As Bitcoin (BTC) lost $ 52,000 support on April 22, the futures funding rate entered negative ground. This unusual situation causes shorts, with investors betting on falling prices, to pay a fee every eight hours.
While the rate itself is mildly damaging, this situation prompts arbitrage bureaus and market makers to buy perpetual contracts (reverse swaps) while simultaneously selling future monthly contracts. The cheaper it is for long-term leverage, the more incentive bulls are to open positions, creating a perfect “bear trap”.
The chart above shows how unusual a negative finance rate is and usually doesn’t last long. As recent data from April 18 shows, this indicator should not be used to predict market lows, at least not in isolation.
Monthly futures are best suited for long-term strategies
Futures tend to trade at a premium – at least they do so in neutral to u2014 bull markets and this happens for every asset including commodities, stocks, indices and currencies.
However, cryptocurrencies have recently seen an annualized premium of 60% (basis), which is considered very bullish.
Unlike the perpetual contract (reverse swap), monthly futures do not have a funding rate. As a result, their price will be very different from regular spot exchanges. These fixed-calendar contracts eliminate the fluctuations observed in funding rates and are the best instrument for longer-term strategies.
As the chart above shows, notice how the premium (base) of 1 month futures has entered dangerously over-leveraged levels, exhausting the possibilities for bullish strategies.
Even those who previously bought futures contracts with the expectation of another rally above the all-time high of $ 64,900 were encouraged to reduce their positions.
The lower cost of bullish strategies could create bear traps
While a cost of 30% or more to open long positions is prohibitive for most bullish strategies, as the base rate slips below 18%, it usually becomes cheaper to long futures than to buy. purchase options. This $ 11 billion derivatives market has traditionally been very expensive for bulls, mainly due to the high volatility characteristic of BTC.
For example, purchasing upside protection using a $ 60,000 call option on June 25 currently costs $ 4,362. This means that the price must increase to $ 64,362 for the buyer to benefit from it – a 19.7% increase from $ 50,423 in two months.
While the call option contract gives infinite leverage on a small initial position, it makes less sense for the bulls than the 3% term premium in June. A 5x leveraged long position will return 120% gains if BTC reaches the same amount of $ 64,362. Meanwhile, the buyer of the $ 60,000 call option would demand that the price of Bitcoin rise to $ 77,750 for the same benefit.
Therefore, while investors have no reason to celebrate the 27% correction that has occurred over the past nine days, investors could interpret the move as a “glass half full”.
The lower the costs of bullish strategies, the more incentive the bulls are to set up a perfect ‘bear trap’, propelling Bitcoin to a more comfortable support of $ 55,000.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You need to do your own research when making a decision.