After Bitcoin futures enters the spot premium, traders look for bearish signals


An unusual phenomenon called “retreat” is happening in Bitcoin (Bitcoin) Futures trading mainly refers to June contracts that expire on June 25.

Fixed-month contracts usually have a slight premium, which indicates that the seller is asking for more money to extend the detention period. Futures should also be traded on a healthy market at an annualized premium of 5% to 15%, which is consistent with the stable currency loan interest rate. This situation is called a futures premium and is not unique to the crypto market.

Whenever the indicator disappears or becomes negative, this is a worrying red flag. This situation is called an inverse spread, which indicates bearish sentiment.

FTX June BTC futures exchanged for Coinbase USD. Source: TradingView

As shown above, there has been a health premium of 0.1% to 0.5% for most of the past three weeks. This corresponds to an annualized interest rate of 2% to 9%, and therefore fluctuates between slightly bearish and neutral.

When short sellers use excessive leverage, the indicator will turn negative, which was the case on June 17. But considering that there is only one week left to expire in June, traders should use longer-term contracts to confirm this situation. As the contract approaches its final trading day, traders are forced to roll over, causing exaggerated volatility.

Huobi’s September BTC futures exchanged against Coinbase USD. Source: TradingView

Compared with the spot market, September futures showed a premium of 1.7% or higher, with an annualized rate of 7%. This shows that the bulls lack appetite, but they are still far from the inverse spread.

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what is the problem?

The last piece of the puzzle is the financing rate of the perpetual contract, which is the tool of choice for retail traders. Unlike monthly contracts, the trading price of perpetual futures prices (reverse swaps) is very similar to regular spot exchanges.

This situation makes life easier for retail traders because they no longer need to calculate futures premiums or manually roll over positions that are nearing expiration.

When more leverage is needed, the longs (buyers) automatically charge the funding rate every eight hours. However, when the situation reverses and the shorts (sellers) become over-leveraged, the interest rate on funds becomes negative and they become the payers.

Bitcoin perpetual futures token margin financing interest rate. Source: Bybt

Since May 24, the funding rate has been fluctuating between positive 0.03% and negative 0.05% every 8 hours. Therefore, at the most “bearish” moments, shorts pay 1% a week to maintain their positions.

In contrast, on April 13, longs paid 0.12% every 8 hours, which is equivalent to 2.5% per week.

Although many traders view the spot premium as a bearish signal, there is currently no sign that short leverage is too high. Therefore, buyers’ lack of interest in the June contract does not accurately reflect the overall market sentiment. If traders are actually bearish, both long-term futures and perpetual contracts will show this trend.

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