When Bitcoin (BTC) lost $ 52,000 support on April 22, futures funding rates plunged into negative territory. This unusual situation forces short-term investors who are betting on lower prices to pay a commission every eight hours.
Although the price is only slightly harmful, this situation creates incentives for arbitrage agencies and market makers to buy fixed contracts (reverse swaps) while selling monthly futures contracts. The cheaper the long-term leverage, the more incentive speculators have to enter trades, creating the perfect bear trap.
BTC – 8 Hour Power Reserve. Source: Bybt
The graph above shows how strange a negative funding rate can be, and it usually doesn’t last long. As the latest data from April 18 shows, this indicator should not be used to forecast low market levels, at least not in isolation.
Monthly futures are more suitable for long-term strategies
Futures tend to trade at a premium – at least they trade in neutral markets compared to the U2014 bull market, and this happens to all assets, including commodities, stocks, indices and currencies.
However, cryptocurrencies have recently had an annual premium of 60% (basis), which is very optimistic.
Unlike a standing contract (reverse swap), monthly futures contracts do not contain a funding interest rate. As a result, the price will differ significantly from the regular spot exchange. These fixed priced contracts eliminate significant fluctuations in funding rates and are the best tool for long term strategies.
Bitcoin – OKEx annual payments of one month (based). Source: Skew
As shown in the chart above, notice how the 1-month futures premium (baseline) has reached dangerously high levels and take advantage of the opportunities for bullish strategies.
Even those who had previously bought futures contracts, expecting further increases of $ 64,900 on a full-time basis, had incentives to cut their positions.
Low Cost Bullish Strategies May Lead to Bearish Traps
Although the cost to open long positions of 30% or more is a contraindication for most bullish strategies, since the base price falls below 18%, it is usually cheaper for long futures than buying options. This $ 11 billion derivatives market is too expensive for bulls, mainly due to the high volatility of BTC.
Bitcoin Options Contracts for June 25th. Source: Deribit
For example, the purchase of the highest level of protection currently costs $ 4362 with a buy option of $ 60,000 on June 25th. This means that for the buyer to win, the price must rise to $ 64,362, which is 19.7% more than $ 50,423 in two months.
While a call option contract gives infinite impact on a small position ahead, it makes less sense to the bulls compared to the June futures premium of 3%. A long position with a 5x engagement will give a 120% gain if BTC reaches the same $ 64,362. Meanwhile, buyers of $ 60,000 buy options will be asking for the bitcoin price to rise to $ 77,750 with the same profit.
Thus, even if investors have no reason to celebrate the 27% correction that has occurred in the past nine days, investors can interpret this move as “half a glass.”
The lower the cost of bullish strategies, the more incentive the bulls have to create the perfect bear trap and feed Bitcoin a more comfortable $ 55,000 support.