Peak fear? Bitcoin funding rates crash to lowest levels in 7 months

The funding rate of Bitcoin (BTC) has dropped to levels not seen since September 2020 as the price of Bitcoin plummeted below $52,000 on April 18. Quant trader and analyst Lex Moskovski says it shows fear has returned to the market.

According to the data from Glassnode, the average Bitcoin futures funding rate across all exchange dropped to as low as around -0.03% on Sunday

What is funding rate and why does it dropping matter?

Bitcoin futures exchanges use a mechanism called “funding” to achieve balance in the market.

The way the mechanism works is simple: if there are more longs or buyers in the market, the funding rate rises, and vice versa.

As such, when the funding rate turns negative, it means the majority of the market is short-selling Bitcoin, indicating fear in the market.

Moskovski said:

“Wow, it’s been a long time since we’ve seen funding this negative. Fear.”

Bitcoin futures perpetual funding rate. Source: Glassnode

Earlier this week, Bitcoin was hovering at 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 day’s highest to lowest point, the price of Bitcoin dropped by almost 15% against the U.S. dollar.

The market sentiment can change so quickly because many traders use high leverage across major exchanges.

During the Coinbase public listing week, the funding rate of Bitcoin was stable at 0.1% to 0.15% on top futures exchanges like Binance and Bybit.

This shows that many traders were aggressively longing or buying Bitcoin, making the futures market incredibly overheated.

When this happens, the incentive to short sell Bitcoin massively increases and it puts the market at risk of a big cascade of liquidations.

BTC/USDT 15-minute price chart (Binance). Source: Tradingview

Will Bitcoin recover soon?

There has been speculation over the past 48 hours that the abrupt drop in the hash rate of the Bitcoin blockchain network led to the price drop.

On April 16, major Chinese…

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