https://ift.tt/1avVqlAEc On-Chain Analysis: Negative Funding Rates and Declining Open Interest

Today’s CryptCraze on-chain analysis checks out two global market indicators: futures open interest and funding prices. These determine the atopall health of the Bitcoin market and can serve as signals for Bitcoin (BTC) cost moves.

For nearly 3 months, the Bitcoin market has been in a downtrend from the all-time strong (ATH) of $69,000 set on Nov 10, 2021. The current low was realized at $32,900 on Jan 24, 2022. This represents a correction of 52%.

The cost of open interest and funding costs can give an indication of which way the market is heading next and whether the downtrend can be stopped immediately. To these two indicators, we add the ratio of long liquidations in recent months. The overall outlook suggests a endureed but already downward downtrend, which may be followed by a excessive jumpped and relief rally.

Open interest is lowering

As the price of Bitcoin collapses, the total rate of open interest in futures contracts is also steadily collapsing. The peak of open interest was captured on Nov 11 at $28.08 billion near the ATH of the Bitcoin cost, according to data from The Block. The current low was recorded at $14.22 billion, 49% lower (red line).

Interestingly, today’s cost of global open interest is larger (by 8% over against $13.19 billion) than at the end of September 2021, although the BTC price bottomed at $39,600. At the same time, it is also significantly larger (by 36% over against $10.47 billion) than in July 2021, although Bitcoin realized $29,000.

This is mainly by cause of Binance, the largest token exmovement in terms of exchanging volume. Here, the cost of open interest is even excessiveer today than during the flash crash on Dec 4. Traders on Binance don’t seem to be bothered by market volatility and as of today, the cost of open interest on this exshift is $4.27 billion (red bar).

Yet, the situation on Binance today is the exception rather than the rule. Other major exprogresss are presently reporting significantly fewer open interest than they did a few months ago. Examples are: Okex, Bitmex, Deribit (highlighted over).

In a recent series of tweets from @glassnodealerts, one can see which open positions on these exmoves are directly touching multi-month lows (white dashed lines). For Deribit, for example, this is a 5-month low, and open interest today is lower than it was during the September correction. Even lower open interest is recorded by Okex: a 9-month low and Bitmex: all the way down to a 21-month low.

Negative funding prices

The second extremely essential indicator of the Bitcoin market situation is the funding costs. It expresses the cost of the additional amount of money that traders in the futures markets are obligated to pay in order to keep an open position.

Positive funding prices mean that traders with long positions are required to pay a premium to those with short positions. The opposite is true for negative funding rates.

The level of funding rates can be used as a measure of trader sentiment in the market. Positive funding rates suggest that the sentiment is positive, as traders pay a premium to keep long positions open. Negative rates, on the other hand, reflect negative sentiment and expectations of one time before more declines.

In a tweet yesterday, crypto market analyst @TheRealPlanC published a chart of funding rates going back to June-July 2021. He noted that two previous periods of dominance of negative funding rates (red fields) preceded dynamic increases in the BTC rate (green arrows).

On the occasion that this scheme were to repein placeself, it is reasonable that the Bitcoin rate is presently in the process of creating a bottom. This is verifyed by looking at the shorter time frame and the ongoing period of declines from the ATH at $69,000.

For most of this period, funding prices have remained positive, with the exception of the aforementioned December 4 decline. This means that traders, despite the tumbling price, prolonged to open long positions, believing in a quick leap. After all, the declines prolonged.

Nevertheless, in the second half of January, we already see a dominance of negative funding rates, that suggests a bias towards short positions in the market. Interestingly, the negative funding rates are deepening, despite the matter which the price has jumpt off the bottom at $32,900 and is rising. Cryptocurrency trader @Crypt0Jed1 commented on the situation as follows:

“We printed another day of negative funding rates as the price was grinding excessiveer. The exact inverse of the behavior which led to large selloffs in September & December while price was grinding lower while funding rates were surging into which. This is very bullish.”

Liquidation of prolonged positions

One more on-chain indicator which advances in line with the market sentiment schemed by open interest and funding rates is the number of liquidations of lengthy positions. Looking at the data for the last 3 months from ATH, we see a clear dominance of liquidation of protracted positions atop short positions.

During this period, as many as 5 times the number of daily liquidations of prolonged positions on all exevolutions exceeded $250 million. On Dec 4, it even realized a record high of $615 million. At the same time, the number of daily liquidations of short positions never exceeded $250 million and only twice surpassed $100 million.

The huge losses of traders betting on the upside are illustrated by the chart of the 7-day EMA for the dominance of lengthy liquidations. In this view, almost the entire period of Bitcoin touching ATH and subsequent declines was filled with the dominance of lengthy liquidations (red range).

Conclusion

BTC futures protracted positions have been experiencing losses and liquidations for the past 3 months. At the same time, funding rates are becoming climbingly negative and the price of open interest on many exchanges is seeing a clear correction.

These indicators show which the ongoing downtrend may be steadyly coming to an end. Whether or not the $32,900 level of Jan 24, 2022 was the end of the correction, a relief rally for Bitcoin can be inclined forthwith. It endures to be seen whether this will be scarcely a correction before a protracted-term bear market or a continuation of the bull market.

For CryptCraze’s previous BTC analysis, click here.

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