Funding Rates as Buy & Sell Signals
Updated
This is a simple study to illustrate something I've been using as a metric for a while. For those who do not know, in basic terms: Positive funding means that long positions are paying to hold their positions. Negative funding means that shorts are paying to hold their positions. This can be reflected in a positive or negative premium, or price difference from "spot" buying (non-leveraged trading). In psychological terms, positive funding can mean traders are biased to the upside, and perhaps getting greedy. Negative funding can mean traders are biased to the downside, and are perhaps getting too fearful. There's a little more to it than that, but hopefully you get the idea!
Above, you can see Bitmex and Binance funding since the end of 2017. Bitmex was much more relevant 4 years ago, while Binance has taken up substantial share in the futures market since 2019. You can see periods where funding was negative, and periods where it was positive. I drew some circles to highlight the relationship between funding and price action.
The Analysis:
It seems that positive funding itself doesn't predict a drop. However, when there are prolonged periods of extremely positive funding (red circles) that's a pretty good sell signal. The most significant periods like this occurred at the end of 2017 (as shown by Bitmex funding - blue) and the period between January and April 2021. I will also point out that during the meme triangle consolidation in 2018, positive funding did (in hindsight) let traders know to sell, and funding would flip negative on those 6k zone tests, signaling traders to buy. However, this all stopped once the triangle broke down.
What is perhaps more helpful is to note that period of negative funding (and particularly huge spikes in negative funding) marked capitulation bottoms or predicted a short squeeze. Those are the green circles and green vertical lines. This is what helped me anticipate a short squeeze after Bitcoin bounced from 29.5k for the last time.
Currently, funding hasn't reached a historical level where we see a longer term pullback. As shown by the green arrows, we can be in a period similar to Nov-Dec. 2020. This means there is the potential for more upside, despite positive funding. We'll see! Certain altcoins have been popping off, which gives me some cause for concern. But funding hasn't gotten close to those levels from earlier this year. I do think it's important to note that volume for Binance futures seems to be declining, due to regulation. In terms of assessing a potential top, I'll be looking across the altcoin market, at Bitcoin dominance, and at the funding rate for clues.
This is meant for speculation and entertainment only - not for financial advice.
-Victor Cobra
Above, you can see Bitmex and Binance funding since the end of 2017. Bitmex was much more relevant 4 years ago, while Binance has taken up substantial share in the futures market since 2019. You can see periods where funding was negative, and periods where it was positive. I drew some circles to highlight the relationship between funding and price action.
The Analysis:
It seems that positive funding itself doesn't predict a drop. However, when there are prolonged periods of extremely positive funding (red circles) that's a pretty good sell signal. The most significant periods like this occurred at the end of 2017 (as shown by Bitmex funding - blue) and the period between January and April 2021. I will also point out that during the meme triangle consolidation in 2018, positive funding did (in hindsight) let traders know to sell, and funding would flip negative on those 6k zone tests, signaling traders to buy. However, this all stopped once the triangle broke down.
What is perhaps more helpful is to note that period of negative funding (and particularly huge spikes in negative funding) marked capitulation bottoms or predicted a short squeeze. Those are the green circles and green vertical lines. This is what helped me anticipate a short squeeze after Bitcoin bounced from 29.5k for the last time.
Currently, funding hasn't reached a historical level where we see a longer term pullback. As shown by the green arrows, we can be in a period similar to Nov-Dec. 2020. This means there is the potential for more upside, despite positive funding. We'll see! Certain altcoins have been popping off, which gives me some cause for concern. But funding hasn't gotten close to those levels from earlier this year. I do think it's important to note that volume for Binance futures seems to be declining, due to regulation. In terms of assessing a potential top, I'll be looking across the altcoin market, at Bitcoin dominance, and at the funding rate for clues.
This is meant for speculation and entertainment only - not for financial advice.
-Victor Cobra
Note
In the short term, if we get a long squeeze, we could see price dropping towards the mid-50k level, or even near 52k. That's the downside risk at the moment. Obviously, price may just hold 62k. People who trade on leverage should be prepared in case something like this happens. Note
I think it would be a bad sign in the short term if Bitcoin cannot hold above those broken downtrends (above).Note
Decent fakeout below the broken trendline - candle closes below the trendline would be more concerning, but funding has cooled off slightly and buyers are still showing up near 60k. Note
Looking pretty good for a test of the pink trendline! Again, watching the broken downtrend for any larger pullback, should the market get some bad news. 
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