Funding rates in cryptocurrency derivatives markets have dropped to their lowest since the height of the 2022 bear market, as short sellers amassed over the weekend.
The sharp decline in funding rates was reported by the on-chain analytics firm Glassnode on Sunday.
“This represents one of the most intense leverage resets in crypto’s history,” analysts remarked, indicating it clearly shows “how aggressively speculative excess has been removed from the market.”
Funding rates are regular payments made between traders in popular crypto derivatives like perpetual futures contracts, designed to keep the perpetual contract price tethered to the spot price.
When funding rates are notably low or negative, it indicates a greater number of short positions than longs, often signaling that derivatives traders anticipate price declines, motivating them to pay to maintain short positions.
Excessive shorts could spur price increases
Nonetheless, extremely low funding rates, like those currently observed, can actually signal bullish conditions as the market may be oversaturated with short positions, raising the possibility of a “short squeeze” if prices begin to ascend.
Crypto markets showing signs of recovery
This seems to be the current trend, as the CoinGlass long/short ratio has turned positive. Approximately 54% of sentiment is bullish or very bullish, while 16% remains neutral and 29% continues to lean bearish.
CoinGlass also reports that long positions currently account for 60%, with 40% remaining short.
However, funding rates remain marginally negative for 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 shown robust recovery, with BTC rising over 5% since its drop below $110,000 on Sunday, while Ether has regained 12% since its fall below $3,800.
Record liquidations in crypto
The largest leverage flush in crypto history, termed by some as “crypto black Friday,” resulted in nearly a trillion dollars in total market capitalization plummeting by 25% within hours, according to TradingView.
Whales positioned themselves with short contracts anticipating a drop following US President Donald Trump’s announcement of additional tariffs on China last Friday. When the sell-off occurred, 1.6 million traders holding leveraged long positions were liquidated.
The volume was so substantial that it triggered the first-ever $20,000 red candlestick in Bitcoin, a $380 billion decrease in its market capitalization, “before a V-shaped recovery as shorts were covered,” stated the Kobeissi Letter on Sunday.
This event not only marked the largest liquidation ever but was also nine times the previous record, it added. Leverage flushes frequently occur in markets, helping to recalibrate them after excessive speculative accumulation in crypto derivatives.
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