Funding rates are an often overlooked but vital aspect of the crypto market. These rates are essential in perpetual futures contracts – financial instruments that allow traders to bet on the price of Bitcoin without an expiration date.
Funding rates help align the price of these contracts with the actual market price of Bitcoin through periodic payments between buyers and sellers. Buyers pay sellers if the rate is positive, indicating a bullish market mood. Conversely, a negative rate indicates bearish sentiment, with sellers paying buyers.
Funding rates show the direction of market leverage and overall sentiment. High funding rates suggest strong bullish sentiment, with traders willing to pay more to hold their bets on rising prices. Meanwhile, low or negative rates portend a bearish outlook, where expectations lean toward lower prices.
According to CoinGlass data, the interest-weighted open funding rate of 0.0921% and the volume-weighted funding rate of 0.0942% showed a high cost for traders holding long positions in perpetual futures ahead of the March 5 Bitcoin correction. The slight difference between these rates comes from the distribution of open interest and volume between different price levels or periods, showing a slight difference in market sentiment and leverage.
This high cost of holding long positions shows that most of the market expected prices to rise even further in the near future. This is especially important as BTC was struggling to regain its ATH of $69,000. Bitcoin briefly broke $69,000 on several exchanges on March 5, but a quick correction brought its price back to $59,500 before rallying back to around $67,000.
The bullish sentiment has manifested itself in the dramatic increase in Bitcoin APR. On March 1, the price of Bitcoin was $61,480 and the APR funding rate was 27.72%. And although a slight increase in the APR was observed during the last days of February, it was not until the beginning of March that it gained momentum. The progression from an APR of 27.72% on March 1 to a sharp increase to 117.52% on the morning of March 5 followed the increase in Bitcoin's price from $61,480 to $68,296 over the same period.
The increase in APR funding rates, particularly the jump seen on March 5, shows that bullish sentiment among traders has intensified. The market is increasingly willing to pay higher premiums to hold long positions in anticipation of further price appreciation.
The rapid escalation of the APR between March 1 and 5, particularly the hourly jump between 01:00 and 09:00 on March 5, represents the culmination of speculative fervor, potentially driven by FOMO as traders rush to capitalize on the upward trend. This scenario often leads to a highly leveraged market where the cost of maintaining long positions becomes exceptionally high, as evidenced by rising APR. The fallout from the March 5 price correction saw the weighted open interest funding rate fall to 0.0504% at press time following $309 million in BTC liquidations over the past 24 hours.
Such conditions increase the market's vulnerability to volatility and corrections. An overleveraged market is susceptible to sudden price pullbacks, where even minor sales can trigger a cascade of liquidations of leveraged positions, leading to sharp price corrections. Historically, significant increases in prices and financing rates have sometimes preceded corrections.
Funding rates soared as traders bet big on Bitcoin's future gains before the correction appeared first on CryptoSlate.