Bitcoin bulls tend to celebrate when BTC’s funding rate is negative, but is it really a “generational buying opportunity?”) perpetual futures has dropped to its lowest levels in over six months, a trend some analysts consider extremely bullish. However, the BTC futures funding rate, which measures the demand between longs and shorts , is greatly influenced by past performance, as historical data indicates.
Bitcoin’s funding rate fee is implemented by exchanges to manage the use of leverage since every trade involving perpetual contracts requires a buyer and a seller of equal size. When buyers are more aggressive, the funding rate becomes positive, indicating that they are paying for the use of leverage. Essentially, one side compensates the other, ensuring the exchange does not hold exposure risk.
Similarly, the funding rate increase in October 2023 occurred alongside a significant event for Grayscale Investments, which won approval to launch a spot Bitcoin ETFfrom the U.S. Securities and Exchange Commission . On October 23, federal Judge Neomi Rao criticized the SEC’s decision as “arbitrary and capricious,” noting the regulator's failure to justify how Bitcoin was different from similar financial products.
The diminished inflows into spot Bitcoin ETFs have also dampened the enthusiasm for leveraged BTC long positions. Given that institutional investors were a major driver of Bitcoin's rally in March, it's logical to anticipate a decrease in demand for leveraged longs as market conditions shift. Consequently, the BTC funding rate is more a reflection of recent price movements rather than a predictor.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
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