According to data from CryptoQuant, on Dec. 18, Bitcoin futures funding rate on Binance Futures overtook Deribit. Historically, in such a situation, the overriding cryptocurrency would see a local top or consolation.
The last 48 hours have seen a significant rise in the funding rate of major cryptocurrencies like Bitcoin and Ether. This is an indication that the futures market is overheating, which raises a probability of a pullback.
Bitcoin has experienced a massive rally in the last two days, with the price hitting a new all-time high above $23,000. There has been a reasonably minor pullback and a consolidation after this recent price surge. After the 23% price spike from $19,300 to $23,800, the 3% to 4% correction is considered fairly small compared to the historical corrections that take place after such a major rally.
After the futures funding rate exceeded 0.1% across major exchanges on Dec. 18, the Bitcoin pullback was inevitable. Bitcoin futures market uses a system known as funding to find balance in the market. This funding rate becomes positive when there are more long contracts in the market. When this happens, the buyers or long contract holders pay short-sellers and when the funding rate is negative, the short sellers pay the buyers.
The funding rate exceeded 0.1$ on Dec. 18 on Bybit and other top exchanges. Since the November price rally that saw Bitcoin reach the $19,000 mark, this was the first time the funding rate was more than 0.1$. at that time when the futures market became overheated, Bitcoin experienced a significant pullback to $16,000.
At that time, a 20% to 30% pullback was possible since the funding rate was consistently high. However, currently, the funding rate has cooled down comparably fast. Therefore, the chances of a consolidation and not a correction are higher, especially since new retail investors are still largely on the sidelines.
The news of Binance Futures funding rate overtaking Deribit was highlighted by a pseudonymous trader on twitter. He said that it seemed that in most cases where Binance funding overtakes Deribit funding there was a sideways move or a top, hence there could be a retail FOMO peak signal.
Looks like most of the times @binance funding overtakes @DeribitExchange funding we get a sideways move or a local top.
It could be a "retail FOMO peak signal".
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— ama8999 (@ama8999) December 19, 2020
Binance futures are used as a way to gauge the overall market sentiment hence the popularity of this trend. When the price of Bitcoin sees a huge price movement, Binance Futures mostly see large liquidations because of its high open interest.
Image courtesy of pixabay
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