Over the past 24 hours, Bitcoin’s permanent future open interest-weighted funding rate has become negative. Negative funding rates usually show bearish sentiment in the futures market, but the majority of liquidation seen in past days is shorts, usually following price increases.
This obvious contradiction makes sense when you look at how the market behaved last week. The financing rate of permanent futures contracts ensures that the contract price matches the spot price by promoting regular payments between the advantage holder and the short position holder.
As observed on March 25th and March 26th, the negative funding rate means the shorts are paying for the long, suggesting that the contract price is below the spot price. According to Coinglass data, the funding rate fell to -0.040% on March 25th, remaining at this level until March 26th.
However, liquidation data tells a different story. Over the hour, the short liquidation totaled $14.19 million compared to just $671,540 on the long, and over the four hours, the shorts saw a $23.5 million liquidation against $2.28 million. A short liquidation occurs when prices rise, forcing short traders to buy back contracts at high prices, covering their positions and amplifying upward movements.
Can negative funding rates indicating bearish sentiment coincide primarily with short liquidation? To answer this, we’ll look at the spot prices of Bitcoin last week.
On March 20th, Bitcoin was closed at $84,175.02. Prices reached just $84,053.96 on March 21, then $83,843.18 on March 22, but have since risen steadily, reaching $86,142.15 on March 23 and $87,512.12 on March 24.
This upward trend was accompanied by a positive funding rate, peaking at 0.050% on March 24, along with an increase of about 4% from March 20 to March 24. It reflects the contract price that lengthens wage shorts, coinciding with bullish price movements, suggesting that traders want to pay premiums to hold their long positions.
The turning point occurred on March 25th. Bitcoin opened at $87,515.76, slightly surpassing the end of the previous day, reaching a high of $88,564.14, continuing its upward momentum. However, the price returned to closure at $87,424.41, a modest decline of $87.71 from March 24th.
On March 26th, the price opened at $87,488.28 and was soaked at a minimum of $87,075.71, but ended at $88,016.46, a profit of $592.05 from the end of the previous day. This price action confirms the occurrence of meetings, albeit with some degree of integration, which would have caused a significant short liquidation observed. This means that betting on a price drop, short traders were caught off guard by upward movements, leading to shorter squeezes and forced to buy back contracts at a higher price.
However, recent negative funding rates suggest that on average the futures market has remained bearish. Funding rates are often calculated over a fixed period, every eight hours, based on the average difference between contract price and spot price. Intraday prices on March 25th and March 26th surged short liquidation, but the average contract price over the funding period likely fell below the spot price, reflecting broader expectations for price adjustments. This expectation could have been driven by price increases last week.
On March 25th, Bitcoin prices were high at $88,564.14 from the lowest price of $86,322.37. This is a $2,241.77 swing. This volatility may have contributed to the disconnection between funding rates and liquidation. The short liquidation was a response to the inter-day gathering, particularly the push to $88,564.14. However, there was a subsequent pullback at $87,424.41 on March 25th, and a decline to $87,075.71 on March 26th could bring the average contract price below the spot price, resulting in a negative financing rate.
This indicates a timing discrepancy between funding rate calculations and real-time market movements. Although liquidation occurs immediately in response to price changes, funding rates reflect the long-term average and capture the general sentiment over the funding period.
Post-short liquidation was inconsistent with the negative funding rates of the eternal future.
