Crypto Funding Rates Drop – What Are the Implications for Bitcoin and Ethereum?

  • Bitcoin and Ethereum crypto funding rates have dropped significantly in recent days.
  • Implied volatility for Bitcoin and Ethereum increased significantly during this period.

Bitcoin [BTC] and Ethereum [ETH] holders have been hit hard by the recent market downturn. However, it wasn’t just holders who were affected.

Low financing rates

Funding rates for both BTC and ETH have dropped significantly in recent days. Negative crypto funding rates can lead some investors to believe that a price drop is imminent, encouraging them to sell their holdings or take short positions themselves.

This selling pressure could contribute to an actual price drop for BTC and ETH.

With negative financing rates, holding long futures contracts becomes less attractive. The costs eat into potential profits, causing some traders to unwind their long positions or be more cautious about opening new ones.

This reduces overall buying pressure, which could weaken price support for BTC and ETH.

The shift in sentiment could lead to higher volatility in the short term. As long and short positions compete, price swings for BTC and ETH could become more pronounced.

Conversely, a significant and sustained decline in financing rates may be viewed as a contrarian indicator by some investors.

They could see this as a sign of excessive pessimism, presenting a potential buying opportunity for BTC and ETH at what they see as a discounted price.

Source: Coinglass

At the time of writing, traders were mildly optimistic about Bitcoin as long positions had finally overtaken short positions, accounting for 50.7% of all trades.

Ethereum saw a similar increase in optimism as the percentage of long positions on ETH grew by 50.9%.

Source: Coinglass

IV grows as prices fluctuate

Implied volatility for both BTC and ETH also increased during this period. An increase in IV indicates that options traders are pricing in a higher probability of significant price movements for BTC and ETH in the future.

Read Bitcoin’s [BTC] Price Prediction 2024-25

This suggests growing uncertainty about the future direction of the markets. If market sentiment is heavily bearish, the negative financing could amplify any price declines due to increased short selling.

In contrast, a sudden positive shift can lead to a stronger price increase due to higher volatility.

Source: IntoTheBlock

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