The funding rate of Bitcoin (BTC) has dropped to levels not seen since September 2020, as the price of Bitcoin fell below $ 52,000 on April 18th. Quant trader and analyst Lex Moskovski says this shows that fear has returned to the market.
According to data from Glassnode, the average Bitcoin futures rate for all futures exchanges fell to as low as -0.03% on Sunday.
What is the funding rate and why does it matter?
Bitcoin futures exchanges use a mechanism called ‘financing’ to achieve balance in the market.
The way the mechanism works is simple: if there are more longs or buyers in the market, the financing rate rises, and vice versa.
As such, if the funding rate becomes negative, it means that the bulk of the market is short selling Bitcoin, indicating fear in the market.
Moskovski said:
‘Wow, it’s been a long time since we saw this negative funding. Fear.’
Earlier this week, Bitcoin hovered around $ 64,000 in anticipation of the Coinbase public listing. At the lowest point of the day on April 18, BTC dropped to as low as $ 50,000.
From the highest to the lowest point of the day, the price of Bitcoin fell by almost 15% against the US dollar.
Market sentiment can change so quickly because many traders use high leverage over large exchanges.
During the Coinbase public listing week, the Bitcoin funding rate was stable at 0.1% to 0.15% on the best futures exchanges like Binance and Bybit.
This shows that many traders have aggressively craved or bought Bitcoin, which has incredibly overheated the futures market.
If that happens, the incentive to sell Bitcoin short will increase en masse, putting the market in danger of a major liquidation.
Will Bitcoin recover soon?
It has been speculated for the past 48 hours that the sudden drop in the hash rate of the Bitcoin blockchain network has led to the price drop.
On April 16, major Chinese mining facilities and swimming pools experienced disruptions after the Xinjiang region in China experienced disruptions.
Consequently, the hash rate of Bitcoin then dropped rapidly, leading to concerns that it would hamper the market sentiment around BTC.
However, Adam Cochran, a partner of Cinneanhaim Ventures, said that the Bitcoin rate drop probably did not cause the price of BTC to fall. He said:
“The idea that a power outage in a mining area in China last night led to the drop in $ BTC is complete nonsense, just like the evil correlation graphs above. But even worse, if you do math * there is no correlation * anyone “are confident in a correlation and have enough data to make a graph, they ask for the receipts. If they have no idea how to perform a regression test, they do not know if it correlates or not.”
If the Bitcoin price decline was not caused by fundamental factors but was merely technical due to an overcrowded futures market, the case strengthens for a quick recovery.
In the short term, it is beneficial for Bitcoin to stay at around $ 56,000 support area as the futures market finds calm and stabilizes funding rates.