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Is Bitcoin’s negative futures funding rate a sign of an upcoming BTC price crash?

On April 18, Bitcoin futures contracts exhibited significant demand for short (sell) positions, sparking speculations of further bearish momentum. This trend was influenced by the lack of inflows into spot Bitcoin exchange-traded funds (ETFs) and the expectations of rising interest rates in the U.S., all contributing to a negative market sentiment.

Bitcoin funding rate flips bearish after 6 months

Retail traders often favor perpetual futures, a type of derivative that closely mirrors the price movements of regular spot markets. To maintain balanced risk exposure, exchanges implement a fee every eight hours, known as the funding rate.

This rate turns positive when buyers (longs) demand more leverage, and negative when sellers (shorts) seek additional leverage. Typically, a neutral funding rate is around 0.025 per 8-hour period or 0.5% weekly. Conversely, negative funding rates, though infrequent, are seen as highly bearish indicators.

Bitcoin perpetual futures 8-hour funding rate. Source: Laevitas.ch

The BTC funding rate notably flipped negative on April 15 and again on April 18, marking the lowest levels in over six months, which indicates a reduced appetite for long positions. This shift in market sentiment typically becomes evident after significant price movements, as seen with the 13.5% decrease in Bitcoin’s price between April 12 and April 18.

Market dynamics often show that the strongest impacts occur when confidence among bears intensifies. For example, some analysts interpret the $72,000 double-top formation as a sign that the downtrend could persist until June.

  Source: CyclesFan

From a broader economic perspective, recent U.S. data showing stronger-than-expected inflation and robust retail sales have reduced investors' aversion to risk. The Consumer Price Index rose 3.8% annually in March, well above the Fed’s 2% target, with retail sales also up by 0.7% year-over-year.

A thriving economy lessens the likelihood of the Federal Reserve reducing interest rates, which tends to favor fixed-income investments. As Reuters points out, a strong labor market has supported consumer spending despite concerns over financial strains among lower-income households.

Bitcoin spot ETFs flows dictate the market sentiment

Farside Investors reports that there was a $165 million net outflow from spot Bitcoin ETFs on April 17, marking the fourth consecutive day of withdrawals. This marks a stark contrast to early April when these ETFs attracted $484 million despite ongoing outflows from the Grayscale GBTC fund.

Data suggests that Bitcoin bulls might have retreated from leveraging after a period of heightened optimism. In March 2024, there were seven instances where the funding rate exceeded 1.2% per week. This led to days of extreme volatility, resulting in significant 48-hour liquidations: $300 million on March 5, $261 million on March 16, and $225 million on March 19.

This volatility has evidently taken a toll on the morale of the bulls, particularly since Bitcoin’s price rose by 12.3% during March. Despite accurately predicting the price movement, the sharp price fluctuations depleted their margin deposits and triggered forced liquidations.

For a deeper understanding of market sentiment, traders are advised to also observe the Bitcoin options markets, where a growing demand for put (sell) options typically signals a focus on neutral-to-bearish price strategies.

Bitcoin options put-to-call volume ratio at Deribit. Source: Laevitas.ch

Recent data indicate that the demand for call (buy) options has exceeded that for put (sell) options by 35% over the past week. In essence, there is currently no evidence in the Bitcoin futures and options markets to suggest an imminent price correction or deteriorating conditions. If anything, the data confirms that the brief dip below $60,000 on April 17 was insufficient to foster a long-term bearish sentiment.

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