A quant has explained how the Bitcoin funding rate (72 hour) may be able to correctly signal tops and bottoms in the price of the crypto.
As explained by an analyst in a CryptoQuant post, the 72-hour version of the funding rate looks to have been effective at pointing out tops and bottoms in the BTC market.
The “funding rate” is the periodic payment that Bitcoin futures traders (either long or short) have to make between each other.
When the value of this metric is negative, it means shorts are paying a premium to the longs to keep their positions right now.
Such values show there are more shorts in the futures market at the moment, and the majority sentiment is bearish.
On the other hand, positive values of the indicator imply longs are dominating the shorts currently. Naturally, this trend means the overall sentiment is bullish in the Bitcoin market currently.
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Now, here is a chart that shows the trend in the BTC funding rate (72 hour) over the past few months:
The relation between the BTC price and the funding rate | Source: CryptoQuant
As you can see in the above graph, the quant has marked the relevant points that help establish a correlation between the Bitcoin funding rates and the price.
It looks like whenever the indicator had a rising value along with the price observing a decline, a sharp correction in the value of BTC took place shortly after.
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This is because investors kept on adding longs (hence why the funding rate became more positive) when the price was instead going down. Such a trade is quite risky as if the trend of decline continues for long, then liquidation can quickly happen.
A large amount of long liquidations can sharply drive the price down, a process that’s called a “long squeeze.” However, an interesting fact here is that the funding rates still had a very low value, which means there weren’t that many longs present.
The analyst in the post has pointed out that any small adjustment in the indicator can affect the price and investor psychology during periods with such volumes.
The metric still seems to have been effective at indicating tops recently as the latest correction in the price of Bitcoin took place soon after a spike in the funding rate.
At the time of writing, Bitcoin’s price floats around $43.7k, down 7% in the past week.
BTC's price plunges down | Source: BTCUSD on TradingView
Featured image from Unsplash.com, charts from TradingView.com, CryptoQuant.com