As Bitcoin (BTC) lost the $52,000 support on April 22, the futures contracts funding rate entered negative terrain. This uncommon situation causes the shorts, investors betting on price downside, to pay fees every eight hours.
While the rate itself is mildly damaging, this situation creates incentives for arbitrage desks and market makers to buy perpetual contracts (inverse swaps) while simultaneously selling the future monthly contracts. The cheaper it is for long-term leverage, the higher the incentives for bulls to open positions, creating a perfect “bear trap.”
The above chart shows how unusual a negative funding rate is, and typically it doesn’t last for long. As the recent April 18 data shows, this indicator should not be used to predict market bottoms, at least not in isolation.
Monthly futures contracts are better suited for longer-term strategies
Futures contracts tend to trade at a premium — at least they do in neutral-to-bullish markets u2014 and this happens for every asset, including commodities, equities, indexes and currencies.
However, cryptocurrencies have recently experienced a 60% annualized premium (basis), which is considered highly optimistic.
Unlike the perpetual contract (inverse swap), the monthly futures do not have a funding rate. As a consequence, their price will vastly differ from regular spot exchanges. These fixed-calendar contracts eliminate the fluctuation seen in funding rates and make the the best instrument for longer-term strategies.
As shown in the chart above, notice how the 1-month futures premium (basis) entered dangerously overleveraged levels, which exhausts the possibilities for bullish strategies.
Even those that previously bought futures in expectation of a further rally above the $64,900 all-time high had incentives to cut their positions.