Bitcoin (BTC) has not dropped below $90,000 since November 18, and continues to fluctuate between $90,000 and $100,000.
Sentiment generally turns bullish as bitcoin approaches $100,000 and investors attempt to continue the bull market. However, this also works the other way around and as bitcoin approaches $90,000, like on Thursday, investors turn bearish.
Bitcoin will move where the maximum pain occurs, so far that is the cutoff period between these two valuations.
Bitcoin derivatives play an important role in these volatile price swings; Derivatives such as futures and options only represent a few percentage points of the overall market capitalization, but they are becoming more influential in the market.
One metric that traders watch closely is the perpetual futures funding rate. This is defined as the average funding rate (in %) set by exchanges for perpetual futures contracts. When the rate is positive, long positions periodically pay off short positions. On the contrary, when the rate is negative, short positions periodically pay off long positions.
During a bull market, bitcoin tends to have a positive funding rate as traders believe the price will continue to rise, but when the market overheats, it tends to lose steam and the price begins to fall, leading to waterfalls. liquidation. .
However, the same goes for the bear market: as prices develop over the years, prices can recover quickly, leading traders to scramble to cover them. Local funds are currently being formed.
As of Thursday, Glassnode data shows the funding rate briefly dipped (-0.001%), the first time this year and only a few times since November. This led to an increase in leverage and a change in sentiment before Bitcoin broke back above $94,000. To compare how mild the negative funding rate was on Thursday, during Covid-19 in March 2020, we saw negative funding rates peak at (-0.309%).
A negative funding rate does not always lead to immediate price bounces or bottoms, but it can be observed in conjunction with other price charting tools and technical indicators to form a view of the market. Negative funding rates could also indicate a continued bear market rather than an immediate bottom. Similarly, positive rates during a bull market might not mean the market is overheated, but could reflect continued strong demand.
Since 2023, the funding rate has been mostly positive as Bitcoin is in a bull market, but it has come with brief periods of negative rates, which tend to occur during price lows. This was seen during the collapse of the Bank of Silicon Valley in 2023 and 2024, just before bitcoin rose higher in both years.
A bottom usually emerges when the funding rate turns negative and bears become overconfident. The same thing happens when the bulls become complacent and the spot price can no longer keep up with the leverage being used. On both occasions, traders tend to get wiped out and in this case, it was the bears.
