Bitcoin Funding Rate: Traders Bearish despite Negative Turn?

Bitcoin recently experienced its highest daily close in over two years on February 20, but it faced resistance at the $52,500 level and was subsequently rejected below $51,000 on February 23. This rejection sparked speculation of potential bearish momentum, as the Bitcoin futures contracts’ funding rate briefly showed an excess of demand for short positions on February 22. Despite this setback, Bitcoin has still seen a 33.5% year-to-date gain in 2021, making bears less optimistic. Some analysts believe that the $1 trillion market capitalization at $50,930 could represent a local top, which has garnered attention from mainstream media and potentially instigated fear among investors.

Multiple rationales have been proposed to explain a potential Bitcoin correction, including Relative Strength Index (RSI) divergences, detachment from Bitcoin-related stocks, a lack of bullish momentum 60 days ahead of the halving, and the fact that around 2.5% of the supply was likely purchased near the $51,500 level. None of these hypotheses should carry significant weight if the net inflow to the spot Bitcoin exchange-traded funds (ETFs) continues. On February 22, U.S.-listed Bitcoin ETFs saw a net inflow of $251 million, reversing the $36 million outflow observed the previous day. Therefore, attention should shift to trading metrics to determine if traders are leaning towards a bearish sentiment after failing to sustain prices above $52,500.

Perpetual contracts, also known as inverse swaps, have an embedded rate that is recalculated every eight hours. A negative rate indicates a preference for higher leverage being utilized by sellers. Bitcoin’s 8-hour funding rate briefly turned negative on February 22, standing above 0.02% (or 1.3% per month), which indicates a lack of demand for leverage longs (buyers). Fluctuations in funding rates are common as market makers seek profit through rate arbitrage at specific snapshot times.

To confirm whether the absence of demand for leverage longs accurately represents the market’s condition, it is necessary to analyze other indicators, such as the demand for stablecoins in China. The USD Coin stablecoin premium versus the official yuan rate in China has consistently remained above 2% since February 12, reaching a peak of 3.5%. This serves as a reliable proxy for retail money entering the cryptocurrency market. It is important to note that the last time the BTC 8-hour funding rate stood above 0.03%, which is 1.9% per month, was on January 2. This means that retail traders using leverage missed out on the entire 30% gain from $40,000 to $52,200 in the 30 days leading up to February 20. Google search trends for ‘buy Bitcoin’ also confirm the lack of interest from retail traders despite recent price gains.

This data suggests that there is still a possibility of a new wave of investors entering the market due to FOMO (fear of missing out). The highest interest in the past 5 years occurred in the week ending January 9, 2021, after Bitcoin’s price had already surged by 150% in two months. This indicates that the absence of demand for leverage longs using Bitcoin perpetual futures does not necessarily indicate bearish sentiment or a lack of interest from retail traders. The slightly negative futures funding rate for Bitcoin futures should not overly concern bullish investors.