Crypto traders say that negative funding rates are a buy signal, but is it true?

Perpetual contracts, also called reverse swaps, have an embedded interest rate, which is usually charged every eight hours. This fee ensures that there is no exchange rate risk imbalance.

Although the positions of buyers and sellers always match, the leverage ratio may be different. When the buyer (long) requires more leverage, the financing interest rate becomes a positive number. Therefore, they are the ones who pay the seller (short).

However, when short positions require additional leverage, the opposite will happen, which will cause the funding interest rate to turn negative.

Bitmex BTC futures weekly financing interest rate, current. Source: TradingView

Bitcoin (Bitcoin) The interest rate on futures financing has been negative since May 18 (37 days). This situation shows that buyers lack interest in leveraged long positions.

Historically, this indicator has changed from 0% to 2% every week, although it may remain at a high level for several months during the bull market. On the other hand, negative funding rates lasting more than a few days were not common in the past.

However, 2020 provides a different situation, as Bitcoin faced an extreme price adjustment in mid-March and it would take 60 days to regain support at $9,300. Another plunge occurred in early September, as prices stagnated from $12,000 and will only recover after 50 days.

2020 Bitmex BTC futures weekly financing rate. Source: TradingView

Note how the weekly financing rates from March to November 2020 were mostly negative, which indicates that sellers (short positions) are asking for more leverage. The current situation is similar to these periods in 2020, with some investors linking negative financing rates to buying opportunities.

related: Data shows that derivatives have nothing to do with Bitcoin’s fall to $29,000

Ki-Young Ju, CEO of the on-chain analytics resource CryptoQuant, has stated that historically, low funding rates “may be a signal to buy”.

However, this analysis is almost entirely a large-scale bull market, with the price of Bitcoin soaring from $11,000 to $34,300. In addition, if negative funding rates can last for 60 days, when should a position be opened?

Cointelegraph previously showed how Combining financing interest rate indicators with futures benchmark interest rates provides better analysis Positioning of professional traders. The annual basis is measured by the price gap between the fixed-month futures and the regular spot market.

Huobi 1-month Bitcoin futures benchmark interest rate.Source: Skew

As shown above, it may be too early to judge the bottom based on the basis indicator, as it has been rebounding close to 0% since June 18.

At present, it is impossible to estimate the timing or triggers that will give buyers confidence and ultimately return the futures market premium to 10%.

For traders trying to “catch the falling knife”, a better strategy might be to increase their long positions by 25% now and expand their bids for every $2,000 below the $30,000 resistance level.

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