Quantum explained how Bitcoin’s funding rate (72 hours) might be able to correctly indicate the tops and bottoms of the cryptocurrency’s price.
Bitcoin funding rate may be able to point to peaks and troughs in the market
As explained by an analyst at CryptoQuant MailThe 72-hour fundraising average appears to have been effective in pointing to peaks and troughs in the BTC market.
The “Funding rate“It is the periodic payment that Bitcoin futures traders (both long and short) have to make between themselves.
When the value of this metric is negative, it means that short positions are paying a premium on long positions to maintain their positions for the time being.
These values show that there are more short positions in the futures market at the moment, and the sentiment of the majority is bearish.
On the other hand, the positive values of the indicator indicate that long positions are currently dominating short positions. Naturally, this trend means that the general trend is bullish in the bitcoin market currently.
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Now, here is a chart showing the trend in the rate of BTC funding (72 hours) over the past few months:
The relation between the BTC price and the funding rate | Source: CryptoQuant
As you can see in the above chart, quantitatively identify relevant points that help establish a relationship between Bitcoin funding rates and price.
It appears that as the value of the indicator increases as the price notices a drop, a sharp correction in the value of Bitcoin occurs soon after.
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This is because investors kept adding long positions (hence the funding rate became more positive) when the price was going down instead. Such a trade is quite risky as if the downtrend continues for a long time, liquidation can happen quickly.
A large amount of long liquidations can cause the price to drop sharply, a process called “long press. However, an interesting fact here is that financing rates are still very low value, which means that there have not been many long contracts.
The analyst indicated in the publication that any slight adjustment in the index can affect the price and the investor’s psychology during periods of such volumes.
The metric is still effective in pointing to recent peaks as the recent correction in the bitcoin price occurred shortly after the funding rally.
At the time of writing this report, Bitcoin price It is floating around $43.7K, down 7% in the last week.
BTC's price plunges down | Source: BTCUSD on TradingView
Featured image from Unsplash.com, charts from TradingView.com, CryptoQuant.com