The price of Bitcoin surpassed its all-time high on Christmas, reaching $24,681 on Binance. Following BTC’s strong rally, traders and analysts are exploring short-term bear and bull cases.
The market sentiment around Bitcoin remains overwhelmingly positive, but there are some concerns put forth by analysts in the foreseeable future and as a result, the next move is not a clear-cut one.
The funding rate of Bitcoin futures
Bitcoin (BTC) has rallied above $24,600 with a relatively small short squeeze. In the past four hours, only $95 million worth of short contracts were liquidated, suggesting that this rally has not been triggered by a short squeeze. A short squeeze occurs when many short contracts, or sell orders, get liquidated in the futures market. This happens when sell orders are overleveraged, which means traders are aggressively selling Bitcoin with borrowed capital.
Since the rally has not been triggered by a short squeeze, the futures market has been dominated by buyers and long contract holders. This trend led the funding rate across major Bitcoin futures exchanges to hit 0.1%. The funding rate is a mechanism that futures exchanges utilize to either incentivize long or short contract holders based on market sentiment. If there are more long contracts, the funding rate turns positive, which means buyers have to incentivize sellers.
The average funding rate of the Bitcoin futures contract on most exchanges is 0.01%. When the funding rate is at 0.01%, the trader has to pay 0.01% of their position as an incentive to short-sellers, who are the minority of the market. However, when the funding rate increases and traders who are buying Bitcoin have to pay large funding fees, it becomes less compelling to long Bitcoin.
Currently, as of Dec. 25, the funding rate of Bitcoin futures is hovering at 0.1%. As such, traders and strategists say that Bitcoin is at risk of a pullback because it has become less compelling to long BTC, at least in the short term. Mohit Sorout, the founding partner at Bitazu Capital, pointed to the extremely high funding rate of Bitcoin to suggest that a pullback is likely: “Would be utterly surprised if $btc just kept going up from here.”
Edward Morra, a cryptocurrency derivatives trader, echoed a similar sentiment. He added that many traders in the futures market started longing or buying Bitcoin after it hit around $24,400. Following the drop, he expects the funding rate to reset after a local correction. Morra tweeted: “deriv traders weren’t buying the dip lower but instead turning omega bullish at the top again, classic. Now, spot chads will flush them, send premiums and funding to baseline and continue after a local correction.”