Funding rates in the crypto derivatives markets have fallen to their lowest levels since the height of the 2022 bear market, as short sellers increased their positions over the weekend.
This significant decrease in funding rates was reported by onchain analytics firm Glassnode on Sunday.
“This represents one of the most severe leverage resets in crypto history,” analysts remarked, indicating it is a clear indication of “how aggressively speculative excess has been removed from the system.”
Funding rates are periodic payments exchanged between traders in popular crypto derivatives, like perpetual futures contracts, designed to keep the perpetual contract price aligned with the spot price.
Extremely low or negative funding rates suggest an excess of short positions compared to longs, often signaling that derivatives speculators anticipate price declines, making traders willing to pay to maintain short positions.
Too many shorts could trigger price increases
However, very low funding rates, such as the current scenario, can be bullish, suggesting that the market might be oversold. An excess of shorts could create a potential for a “short squeeze” if prices begin to rise.
Crypto markets are showing signs of recovery
This seems to reflect the current situation, as the CoinGlass long/short ratio has shifted to a bullish stance. Approximately 54% of sentiment is bullish or very bullish, while 16% is neutral and 29% remains bearish.
CoinGlass also reports that long positions currently make up 60%, with 40% still shorting.
However, funding rates remain slightly negative across Bitcoin (BTC) and Ether (ETH) perpetual swaps, according to CoinGlass.
Related: ETH, BNB, DOGE lead as crypto market cap rebounds to $4T
Spot markets have rebounded significantly, with BTC rising over 5% since its drop below $110,000 on Sunday, while Ether has appreciated by 12% since plummeting below $3,800.
Largest liquidation event in crypto history
The biggest leverage flush in crypto history, referred to by some as “crypto black Friday,” saw nearly a trillion dollars in total market capitalization drop by 25% within hours, according to TradingView.
Whales accumulated short positions expecting a market decline following US President Donald Trump’s announcement of new tariffs on China on Friday. When the decline occurred, 1.6 million traders holding leveraged long positions were liquidated.
The volume was so intense that it resulted in the first-ever $20,000 red candlestick in Bitcoin, leading to a $380 billion decrease in its market cap, “before a V-shaped recovery as shorts were closed,” reported the Kobeissi Letter on Sunday.
Not only was this the largest liquidation ever, but it was also nine times greater than the previous record. Leverage flushes frequently occur in markets and help reset them following periods of excessive speculative activity in crypto derivatives.
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