Bitcoin’s overnight retreat from all-time highs has normalized funding rates in the cryptocurrency perpetual futures market.
The market could continue to cool in the coming weeks, one observer said.
Bitcoin (BTC)’s overnight pullback to new record highs has eliminated excess leverage from the market, normalizing funding rates in the cryptocurrency perpetual futures market.
The leading cryptocurrency by market value fell 10% to $59,700, after reaching a new all-time high above $69,000. The correction led to the forced closure of $1 billion worth of leveraged perpetual futures bets in digital asset markets.
The CoinDesk 20 Index (CD20), a broader market indicator, rose to a high of $2,627 on Tuesday and has since retreated to $2,496.
Since then, annualized funding rates, or the cost of holding leveraged bets on perpetual futures tied to the top 25 cryptocurrencies, have returned to less than 20%, down significantly from the triple-digit figures seen a few days ago.
In other words, the overheated perpetual futures market has cooled, opening the door to a longer-lasting move toward record highs. Funding rates soared above 100% earlier this week as bitcoin’s strong bullish momentum saw investors jump in with both feet, using leveraged products to maximize gains.
Exchanges use the funding rate mechanism to keep perpetual prices aligned with spot prices. A positive funding rate means that perpetuals are trading at a premium to the spot price, indicating greater demand for bullish bets. Therefore, a high funding rate, as seen earlier this week, is said to reflect excessive optimism, often seen at interim market highs.
Velo Data’s chart shows that funding rates for the top 25 cryptocurrencies have ranged from slightly positive up to 150% or more over the past week.
The latest reading for most coins is below 20%.
According to John Glover, chief investment officer at Ledn, the market could continue to deleverage in the coming weeks, potentially pushing the price of bitcoin to $40,000.
“The euphoria surrounding the recent BTC price rally is very reminiscent of the last time we traded at $65,000. Although many people point to the fact that the sell-off that occurred after November 2021 (and previously after April 2021) was due to bad traders in the market, I would argue that while it may have been precipitated by bad traders, the sell-off was due to people being overleveraged with unrealistic expectations of linear appreciation up to $100,000,” Glover said in an e- email.
“I believe we are in the same situation again and in the coming weeks we will see a correction towards the lower mid-$40,000 area. Things always look bullish at the peak,” Glover added.
