As Bitcoin set new highs this week, derivatives traders kept the average funding rate for Bitcoin perpetual swaps low. This suggests that they are expecting BTC to climb further.
Longs Pay Shorts (Slightly)
According to data from blockchain analytics firm Glassnode, the average funding rate for Bitcoin (BTC) perpetual swaps across major cryptocurrency exchanges remains at 0.05%.
This is despite BTC rallying over 21% this week, breaking the $50k mark to set a new all-time high of $57,752.78 at press time.
The lack of any marked increase in funding rates for the novel swaps suggests a couple of things. First of all: investors and traders are buying BTC in the spot markets rather than using leverage.
Moreover, the average funding rate remaining slightly above zero indicates that traders doing BTC perpetual swaps are not ready to enter short positions just yet, despite the top cryptocurrency’s record high price. In other words – they don’t see the price dropping.
Compounded together, these two observations suggest the market expects BTC to go even higher.
Futures for the Future
A perpetual swap (or future) is an advanced form of financial instrument. It allows traders to bet on the future price of an underlying asset, in this case, BTC.
A normal future obligates a trader to buy its underlying asset at a pre-agreed price at a specific date in the future. This date is called the future’s “expiration” or “settlement” date.
Traders can also trade futures in a futures’ market before the settlement date. This means the price of futures can change. However, as the settlement date approaches, the future’s price normally converges to the price of the underlying asset.
Perpetual futures differ in that they have no settlement date; traders can hold them in perpetuity unless liquidated. Accordingly, their prices can diverge drastically from the underlying asset (if traded) as they have no settlement date to anchor them.
Therefore, major cryptocurrency exchanges use a funding rate mechanism to help keep the price of perpetual futures close to the price of their underlying assets.
The funding rate comprises of an interest rate, set by the exchange, and a premium (the price difference between the future and the asset), set by the market.
When the price of the perpetual future is significantly higher than its underlying asset, the funding rate increases and vice versa.
The funding rate is paid between traders depending on whether it is positive or negative. In other words, long position holders pay short position holders when the funding rate is positive and vice versa.
On most exchanges, the payment occurs after a set interval (e.g. on Binance, traders make payments every eight hours).
Six Figures Coming for BTC?
Perpetual swap traders inevitably make decisions based on the market of the underlying asset. However, their decisions often provide an insight into the level of risk the market is willing to assume.
In this case, as Bitcoin soared past the $40,000 mark and then the $50,000 mark, traders seemingly opted to buy and hold BTC itself rather than use leverage.
As a result, the funding rate remained low. Moreover, historically, as BTC rallied without a break in sight, short traders came out in droves.
Whether this will continue, only time will tell. But with the five-figure territory now solidly covered, $100,000 per Bitcoin seems very possible.
And the market seems to expect as much.