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 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.
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.
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