Bitcoin, Ethereum Funding Rates Remain Negative Amid Market Volatility

The funding rates for Bitcoin and Ethereum, the leading cryptocurrencies by market cap, remain negative for derivative traders, suggesting a potential short-term bull signal. 

The Federal Reserve’s recent interest rate hikes and plans for future tightening of policy have placed increased pressure on markets across the globe. This past Friday, Federal Reserve Chairman Jerome Powell reiterated his intent to counter inflation with higher interest rates in the near future. Markets reacted sharply to inflation news in May and have continued to slowly make new lows amid a summer of economic turmoil. 

The macroeconomic picture has bled into prices for derivatives, which are contracts whose value is dependent on an underlying asset or group of assets. Derivative prices have kept funding rates generally below zero since May.

Funding rates are periodic payments between traders to make the perpetual futures contract price close to the index price, or the underlying crypto constituting the futures contract. A perpetual futures contract is an agreement to buy or sell an asset at a predetermined price without an expiration date on the contract.

While this may seem technical, funding rates are designed to show the overall sentiment of the traders and how they view future market conditions. When funding rates remain negative, it indicates how traders are short, or expect the market to go down. When funding rates are positive, it implies how traders are long, or expect the market to go up in the long run.

The sample chart above from crypto analytics firm CryptoQuant shows how funding rates under zero indicate that most traders expect lower Bitcoin levels to come, while funding rates above zero would show that traders expect higher future prices. Negative funding rates suggest that many market traders are bearish; however, this brings opportunity for potential buyers of futures contracts.