Bitcoin Rebounds to $51K as Derivatives Market Cools Off

The bitcoin market looks to be in a more healthy state after massive long liquidations blew the froth off the futures market.

Feb 24, 2021 at 12:24 p.m. UTC
Updated Sep 14, 2021 at 12:16 p.m. UTC

Bitcoin looks to have turned the tide after suffering heavy losses earlier this week amid an over-euphoric derivatives market.

The number one cryptocurrency rose back above $50,000 early this morning, having suffered a double-digit percentage drop to as low as $45,000 from all-time highs around $58,000 around midnight UTC on Monday, according to CoinDesk 20 data.

Following the drop, the perpetual futures funding rate – the average cost of holding long positions on major exchanges – has declined to 0.02%. It had been signaling excess bullish leverage and scope for a price correction with a rise to a multi-month high of 0.13% earlier this month, according to data source Glassnode.

"The funding rates have returned to neutral territory, and the market seems healthier," Arcane Research noted in its weekly report.

Exchanges offering perpetuals, or futures with no expiry, calculate the funding rate every eight hours. A positive funding rate implies that longs pay shorts and is reflective of bullish market positioning. Therefore, a very high funding rate is considered a sign of extreme bull sentiment, or "froth," and often precedes violent price pullbacks, similar to the one seen this week.

Bitcoin's average perpetual funding rate

Bitcoin's plunge to $45,000 this week triggered long liquidations worth over $2 billion, according to data source Coinalyze.

Long liquidation refers to a forced unwinding (selling) of bullish trades by exchanges, which often leads to an exaggerated price drop. Forced closure happens when the price drops beneath a predetermined limit (the liquidation price), creating a margin shortage on leveraged positions.

Essentially, over-leveraged traders have exited the market over the past two days. Hence, the chances of a deeper pullback previously anticipated by some analysts look to have dropped.

"The decline in the funding rate will tame the selling pressure," Patrick Heusser, head of trading at Crypto Finance AG, told CoinDesk. "I am looking for consolidation between $45,000 to $50,000."

A sharp decline in the futures premium – the spread between futures prices and spot market prices – seen over the past 48 hours also indicates that the derivatives market has cooled down.

Bitcoin futures premium

The annualized three-month premium on the institution-focused Chicago Mercantile Exchanges has slipped to 14% from the multi-month high of 23% seen on Monday, according to data source Skew.

However, while the derivatives market has lost its froth, bitcoin may still be vulnerable to a continued rally in U.S. bond yields.

That said, U.S. yields have come under pressure today, after Federal Reserve Chairman Jerome Powell assured markets of continued monetary stimulus.

At press time, bitcoin is trading around $50,840, up 8.4% over 24 hours.

The Festival for the Decentralized World
Thursday - Sunday, June 9-12, 2022
Austin, Texas
Save a Seat Now

DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

Trending

1
Institutional DeFi Enabler? Data Firm Kaiko Probes DEX Liquidity With New Product

The data feed unpacks what’s what in Uniswap, SushiSwap, Curve Finance and Balancer asset pools.

The data feed unpacks what’s what in Uniswap, SushiSwap, Curve Finance and Balancer asset pools.

2
US Appeals Court Orders SEC to Bring Enforcement Actions to Jury Trials

The 5th Circuit Court of Appeals found that the targets of SEC enforcement actions had their constitutional rights violated by the use of in-house judges.

The 5th Circuit Court of Appeals found that the targets of SEC enforcement actions had their constitutional rights violated by the use of in-house judges.

3
First Mover Asia: Pine Wants to Test the Liquidity of the NFT Market; Cryptos Are Well-Red

The number of users on NFT markets is at its lowest point this year, but still higher than in 2021. The crypto lending platform sees an opportunity.

The number of users on NFT markets is at its lowest point this year, but still higher than in 2021. The crypto lending platform sees an opportunity.

4
CFTC Chair Indicates Agency Will Increase Crypto Enforcement: Report

Rostin Behnam said the agency was facing a rapidly increasing number of cases and would add resources to address crypto fraud.

Rostin Behnam said the agency was facing a rapidly increasing number of cases and would add resources to address crypto fraud.