Bitcoin's Perpetual Funding Rate Turns Negative, Signaling Potential Local Bottom

Key Points:

Bitcoin is currently fluctuating within the range of $90,000 and $100,000.
The perpetual funding rate recently dipped to negative, often indicating a potential local price bottom.

Article Content:

Bitcoin (BTC) has remained above the $90,000 threshold since mid-November and is continuing to oscillate between the $90,000 to $100,000 mark. Typically, investor sentiment turns bullish as the price nears $100,000, while bearish tendencies arise as it approaches $90,000.

This volatility suggests that Bitcoin’s movement is largely dictated by market sentiment amid trading derivatives like futures and options. Although these derivatives constitute a small fraction of the market capitalization, their impact on price fluctuations is becoming more pronounced.

Traders monitor the futures perpetual funding rate, which represents the average rate charged by exchanges for perpetual futures contracts. A negative rate indicates that short positions pay long positions. During bullish phases, the funding rate often remains positive, contrary to the behavior during bearish trends where negative rates might foreshadow a market recovery.

As of Thursday, the funding rate reached -0.001%, marking a distinct downward shift and influencing market sentiment prior to Bitcoin reclaiming a price above $94,000. Historical comparisons show that during the COVID-19 pandemic in March 2020, rates hit a record low of -0.309%.

Although a negative funding rate does not guarantee an immediate price rebound, it can be relevant when analyzed alongside other market indicators and technical assessments. Similarly, positive rates during bullish trends might not always signal overheating, but reflect ongoing robust demand in the market.

BTC Futures Perpetual Funding Rate BTC Futures Perpetual Funding Rate (Source: Glassnode)

Recent trends have shown that while the funding rates mostly remained positive throughout 2023, they have also shown temporary dips, often leading to price recoveries. These dips serve as indicators for traders, suggesting that price resistance is becoming established, ultimately resulting in the liquidation of positions—primarily impacting those in bearish trades.