Data shows that Bitcoin funding rates on the cryptocurrency exchange BitMEX have turned quite negative recently. Here’s why this could be bullish.
Bitcoin funding rates on BitMEX have dropped to deep reds
As noted by an analyst in a CryptoQuant after, BTC felt a bullish boost the last time this pattern was observed. The “funding rate” is an indicator that measures the number of periodic fees that futures traders on a derivatives exchange are currently exchanging among themselves.
When the value of this measure is positive, it means that the holders of long contracts are currently paying a premium to the short holders to maintain their positions. Such a trend implies that the majority of investors in the stock market are currently optimistic.
On the other hand, negative values of the indicator suggest that the shorts are currently overwhelming the longs. Of course, this kind of trend is a sign that a bearish mindset is more dominant among the futures traders on the platform.
In the context of the current discussion, the relevant derivatives exchange is BitMEX. Here is a chart showing the trend in Bitcoin funding rates for this platform over the past year and a half:
Looks like the value of the metric has been quite red in recent days | Source: CryptoQuant
As can be seen in the chart above, Bitcoin funding rates on the BitMEX exchange have recently plummeted toward deep negatives. This means that a large number of short contracts accumulate on the platform compared to long contracts.
In general, when the futures market becomes too unbalanced to one side, a sharp price move in the opposite direction of what investors are betting heavily on becomes more likely.
This is because a mass liquidation event, called a “squeeze”, is generally more likely to occur on the side that has more contracts open. In a situation of pressure, a swing in price causes a large number of simultaneous liquidations, and these liquidations ultimately only fuel that movement. Thanks to this amplified price movement, a cascade of liquidations can then take place.
Since funding rates on BitMEX are currently heavily skewed to the negative side, a short-term short squeeze is a possibility. The chart shows that the indicator showed a similar trend just earlier in the year.
This negative peak in March occurred when the price of Bitcoin fell below the $20,000 level, but these reds were only temporary, as a short squeeze occurred not long after and BTC recovered spectacularly.
The metric saw even more negative readings after the November 2022 FTX crash, but the price saw no noticeable increase after that. Nevertheless, Bitcoin still saw the bottom coincide with the red BitMEX funding rates.
It now remains to be seen whether the pattern seen in March 2022 will repeat itself this time around, with BTC sensing a short squeeze that reverses the current decline.
BTC price
At the time of writing, Bitcoin is trading around $27,500, down 4% over the past week.
BTC seems to have plummeted over the last couple of days | Source: BTCUSD on TradingView
Featured image from iStock.com, charts from TradingView.com, CryptoQuant.com