According to Glassnode, the average coverage ratio for bitcoin futures on the exchange fell to -0.03% on Sunday.
What is the funding rate and why is it falling?
Bitcoin futures exchanges use a mechanism called funding to achieve market equilibrium.
The principle of the mechanism is simple: When there are more long positions or more buyers in the market, the refinancing rate rises and vice versa.
So if the funding ratio goes negative, it means that most of the market is going short in bitcoin, indicating that the market is scared.
Wow, it’s been a long time since we’ve seen such negative funding. Fear.Bitcoin futures with open-ended funding. Source: Glassnode
Earlier this week, before Coinbase’s IPO, bitcoin hovered around $64,000. At its lowest point on the 18th. In April, BTC was at $50,000.
Between the highest and lowest points of the day, the price of bitcoin fell nearly 15 percent against the U.S. dollar.
Market sentiment can change so quickly because many traders use high leverage on the major exchanges.
In the week of its public listing on Coinbase, the bitcoin funding rate remained stable between 0.1% and 0.15% on major futures markets such as Binance and Bybit.
This shows that many traders are aggressively greedy or buying bitcoin, which has caused the futures market to become incredibly overheated.
When this happens, the incentive to go short in bitcoin increases dramatically, exposing the market to the risk of a large liquidation cascade.
Graph of the 15-minute BTC/USDT price (Finance). Source: View of the shop
Will bitcoin get better soon?
Over the past 48 hours, there has been speculation that a sharp drop in the hash rate of the bitcoin network has led to a drop in price.
The 16th. In April, power outages occurred in major Chinese companies and mining basins due to power outages in China’s Xinjiang region.
As a result, the hash value of bitcoin then fell rapidly, raising concerns that this would affect market sentiment around bitcoin.
However, Adam Cochran, a partner at Cinneanhaim Ventures, said that the drop in the price of bitcoin hash probably did not cause the drop in the price of BTC. He said:
The idea that yesterday’s power outage in China’s mining region caused the decline in $BTC is complete nonsense, as are the false correlation charts above. But worse, there is no correlation* if you do the math. If someone is convinced of the correlation and has enough data to prove it, ask them for proof. If they have no idea how to run a regression test, they don’t really know if there is a correlation or not.
If the drop in bitcoin prices was not caused by fundamental factors, but was purely technical due to a crowded futures market, then the case for a quick recovery is strengthened.
In the short term, it is beneficial for bitcoin to remain around the $56,000 support area if the futures market catches on and funding rates stabilize.
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