One quant explained that the Bitcoin funding rates (72-hour) might be capable of correctly signalling tops or bottoms for the cryptocurrency’s price.
Bitcoin Funding Rate Could Indicate Market Tops and Bottoms
An analyst explained in CryptoQuant that the 72-hour funding rate was effective in showing tops and bottoms of BTC markets.
The “funding rate” is the periodic payment that Bitcoin futures traders (either long or short) have to make between each other.
If this metric’s value is negative it indicates that shorts pay a premium to longs in order to maintain their position right now.
These values indicate that there are more shorts on the futures markets at the moment and the majority of sentiment is bearish.
Conversely, positive indicators indicate longs outnumbering shorts. This trend indicates that the Bitcoin market is currently feeling bullish.
Bitcoin Trading Volume Continues To Remain At Low Levels| Bitcoin Trading Volume Continues To Remain At Low Levels
Below is a chart that illustrates the BTC funding rate trend (72-hour) for the past several months.
Relationship between BTC price and funding rate Source: CryptoQuant| Source: CryptoQuant
The graph above shows that the quant marked the points relevant to establish a correlation between Bitcoin funding rates, and price.
A sharp correction in BTC value occurred shortly after an indicator with a rising price and a falling price.
Similar Reading: Bitcoin Exchange Traded Products Close to 1% of Total BTC Supply| Bitcoin Exchange Traded Products Near 1% Of Total BTC Supply
This happened because investors were constantly adding longs to the fund (hence the positive funding rate), even though the price was falling. It is risky to trade this way because, if the trend towards decline continues, liquidation may occur quickly.
A large amount of long liquidations can sharply drive the price down, a process that’s called a “long squeeze.” However, an interesting fact here is that the funding rates still had a very low value, which means there weren’t that many longs present.
An analyst has commented in this post that slight adjustments to the indicator could affect investor psychology and the price during times of high volumes.
As the most recent correction to the Bitcoin price occurred soon after an increase in the funding rate, the metric seems still effective in indicating tops.
BTC Prices
At the time of writing, Bitcoin’s price floats around $43.7k, down 7% in the past week.
BTC prices plunge | Source: BTCUSD on TradingView
Unsplash.com featured image, Charts from TradingView.com and CryptoQuant.com charts
