Funding rates suggest more downside potential
However, QCP Captial analysts suggested that the elevated funding levels could indicate that the current price correction in the cryptocurrency market still has some way to go. “The forward curve is still surprisingly elevated. Even now, you can lock in a 23% risk-free yield on an ether April spot-forward spread. The desk is still seeing strong interest to sell these spreads. We expect they cannot stay so high for much longer, especially if market continues to move lower,” QCP Capital analysts added.
According to ETC Group Head of Research André Dragosch, current funding rates indicate that both assets have more downside potential.
“This is also corroborated by other sentiment and positioning indicators in my view. However, any kind of pull-back should be viewed as a short-term opportunity to increase exposure ahead of the upcoming Halving in April,” Dragosch told The Block.
High funding rates despite spot downturn
Speculators still holding long positions
According to cryptocurrency derivatives trader Gordon Grant, the elevated funding rates indicate the persistence of speculator length, the extent to which speculators are willing to hold their positions in the market. He added that current elevated funding rates signaled the presence of “diamond handed speculators, but speculators nonetheless.”
Grant told The Block that the latest dynamic also indicates that actual bitcoins available for trading are limited compared to the demand for them. “This is because spot bitcoin ETF assets under management continues to scale and bitcoin becomes effectively locked up in custody underlying those shares, so that the bitcoin that someone ultimately needs to hold to support futures positions is effectively dearer. The high funding rates are the market’s way of incentivizing people to hold bitcoin or ether spot and sell it forward,” he added.
Grant suggested that compared to the corresponding period in bitcoin’s price cycle in 2021, there are currently very few, if any, functioning centralized finance (CeFi) lending markets available to alleviate funding pressures. Consequently, “rate markets cannot play the role they once did,” Grant added.
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