Bitcoin Continues to Swing Between $90,000 and $100,000 as Sentiment Flips Bullish
The price of Bitcoin (BTC) has been stuck in a range between $90,000 and $100,000 since November 18, with the sentiment generally flipping bullish when it approaches the higher end of this range. However, this also works the other way around, and as Bitcoin heads towards $90,000, like on Thursday, investors tend to turn bearish. This volatility is a result of the dynamic interplay between various market forces, including derivatives such as futures and options.
The Role of Derivatives in Bitcoin's Price Swings
Derivatives play a significant role in these price swings, despite making up only a few percentage points of the overall market capitalization. The impact of derivatives is becoming increasingly felt in the market, with traders keenly observing various metrics to gauge market sentiment and make informed investment decisions. One such metric that traders observe closely is the futures perpetual funding rate.
Understanding the Futures Perpetual Funding Rate
The futures perpetual funding rate is defined as the average funding rate (in %) set by exchanges for perpetual futures contracts. When the rate is positive, long positions periodically pay short positions, while a negative rate means short positions pay long positions. During a bull market, Bitcoin tends to have a positive funding rate, as traders believe the price will continue to rise. However, when the market gets overheated, it tends to run out of steam, leading to liquidation cascades and eventually a decline in prices.
Negative Funding Rate and Its Implications
A negative funding rate doesn't always lead to an immediate price rebound or bottom, but can be watched alongside other price-chart tools and technical indicators to form a market view. Negative funding rates could also signal a continued bear market rather than an immediate bottom. Similarly, positive rates during a bull market might not mean the market is overheated, but could reflect continued strong demand.
The Significance of Negative Funding Rates in Historical Context
Since 2023, the funding rate has mostly been positive due to Bitcoin being in a bull market, yet it has come with brief periods of negative rates, which tend to occur during price bottoms. This was seen during the Silicon Valley Bank collapse in 2023 and 2024, just before Bitcoin climbed higher in both years. A floor tends to emerge when the funding rate goes negative, and bears become overconfident. The same occurs when bulls become complacent, and the spot price can no longer keep up with the leverage being used.
The Recent Negative Funding Rate and Its Impact
As of Thursday, Glassnode data shows that the funding rate briefly went negative ( -0.001%), the first time this year and only a few times since November. This led to a leverage flush and a sentiment re-shift before Bitcoin moved back above $94,000. To compare how mild the negative funding rate was on Thursday, during covid-19 in March 2020, we saw negative funding rates peak at (-0.309%). The recent negative funding rate was relatively mild compared to historical precedents.
Market Sentiment and Price Action
The sentiment generally flips bullish when Bitcoin approaches $100,000, and investors try to continue the bull market. However, this also works the other way around, and as Bitcoin heads towards $90,000, like on Thursday, investors tend to turn bearish. The price of Bitcoin will move where maximum pain occurs, so far that is the chopping period between these two valuations.
Conclusion
The current price action in Bitcoin is a result of various market forces interacting with each other. Derivatives such as futures and options play a significant role in these price swings, despite making up only a few percentage points of the overall market capitalization. The futures perpetual funding rate is one metric that traders observe closely to gauge market sentiment and make informed investment decisions. A negative funding rate doesn't always lead to an immediate price rebound or bottom, but can be watched alongside other price-chart tools and technical indicators to form a market view.