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Bulls for Bitcoin Derivatives Market Are Gone

The bitcoin perpetual swap, the most liquid and traded futures instrument, is a contract that allows traders to speculate on the bitcoin price with leverage. While there is always an equal amount of long and short, the positioning of those contracts relative to the spot bitcoin price shows the bullish/bearish bias in the derivatives market. When the contract price of a perpetual futures contract (a futures contract that never expires) is higher than the bitcoin price in the spot market, the perpetual futures funding rate will be positive, meaning longs pay a percentage of their nominal position size. The opposite is also true. There is usually a bullish bias in futures markets. For much of 2021, perpetual futures contracts continued to lead the spot markets by wide margins, indicating a strong bullish bias on the part of speculators. Recently, funding has turned negative, showing that perpetual futures are trading below the spot, and this is not the result of cascading liquidations driving the price up, but rather a turnaround in sentiment and market expectation. In the past 24 hours, perpetual futures funding was 8.23% negative yoy, meaning shorts pay 8.23% long yoy based on their nominal position size. While it’s certainly possible that the downtrend will accelerate due to an increasingly uncertain macroeconomic outlook and Fed hawkishness, seeing negative funding persist is a good sign for bitcoin bulls. but averaged over a seven-day period to adjust for variance: Bitcoin per hour perpetual financing rate annualized seven-day average What you should watch for in the coming weeks is increasing negative financing rates coupled with rising outstanding interest, similar to what we saw in the summer saw from 2021.
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