Bitcoin Funding Rates & Liquidations

BTC News #39

Over the weekend the Bitcoin price took a substantial nosedive that had many speculators calling for a top in the cycle. Like always, we can never be 100% sure whether it is a cycle top or not. However, we can analyze the metrics that we know to make an informed decision to protect our profits and risk.

Here is a tweet from Mira which shows how normal this drop has been month over month this year.

The question is, why do these mega dumps happen? The answer is an over leveraged market and insanely high funding rates.

According to Willy Woo, 9000 BTC was deposited into Binance 9.5 hours into the mining difficulty adjustment. “The difficulty adjusts every 2 weeks to match the natural increase in hash rate from miners. This keeps block times to a steady 10 mins. If you're going to slow the network down, this is the best window to do so.” We can’t be sure as to why there was such a big influx of deposits. Likely it was Bitcoin whales manipulating the price as 20,700 BTC were withdrawn from Binance after the dump.

The initial 9000 BTC created enough sell pressure on the price to break support at $59,000 and cause one of the biggest liquidation events in Bitcoin history. $4.9 billion was liquidated which plummeted the price down to just over $51k. Liquidations happen when active traders are too over leveraged causing their positions to be liquidated by the exchange when the price dumps and their position goes to zero. Likely, there were many stop losses set as well at the $59k support area. Futures Open Interest was significantly reduced overall.

Here is a chart from Glassnode’s latest newsletter showing the liquidations.

The one thing that concerned me was the long-term bull channel I was following was broken.

Funding Rates

Prior to the Sunday dump, funding rates were getting extremely high. Funding rates are set by exchanges for perpetual swap contracts. When the rate is positive, long positions periodically pay short positions. Conversely, when the rate is negative, short positions periodically pay long positions. The mean Funding Rate across exchanges is an average of each exchange's Funding Rate weighted by the Open Interest of the corresponding exchange.

As funding rates rise it shows us traders are heavily long, signalling an over leveraged market. Vice versa when the funding rate decreases and goes negative, the market is signalling an oversold market. If the price goes in the opposite direction to the funding rate it can create a series of liquidations that causes the price to make an extremely volatile move until it settles at a particular price that acts as support. This aligns with what happened on Sunday.

  1. Market became over leveraged from traders longing due to the Coinbase listing. Funding rates started increasing.

  2. Big whale/s moved 9000 BTC into Binance creating massive sell pressure.

  3. Price broke key support area causing over leveraged traders to be liquidated and stop losses hit which caused the price to dump.

  4. High funding rates can signal this before hand. After the dump they reset.

There was definitely some scary moments during Sundays dump, however price has found support. It actually wasn’t one of Bitcoins famous 30%+ dumps. Funding rates and other key metrics have reset. The next week or two will be interesting to see how price action responds and if we resume the bull cycle immediately.

In the news…

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Nothing in this article is investment advice. I’m not a financial advisor. Do not make investment decisions based on what is in this article or any other article written by BTC News or Blockedia.