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The data shows that Bitcoin funding rates on the BitMEX cryptocurrency exchange have become quite negative recently. That’s why it might be bullish.
Bitcoin replenishment rates on BitMEX fell to red values
As an analyst pointed out in a CryptoQuant post, BTC felt bullish when this pattern was last seen. “Funding Rate” is a metric that measures the amount of periodic fees that futures traders on a derivatives exchange are currently exchanging with each other.
When this indicator is positive, it means that long contract holders are currently paying a premium to short contract holders in order to maintain their positions. This trend means that the majority of investors on the exchange are now bullish.
On the other hand, negative values of the indicator indicate that short positions prevail over long ones at the moment. Naturally, such a trend is a sign that a bearish mentality is prevailing among futures traders on the platform.
In the context of the current discussion, the relevant derivatives exchange is BitMEX. Here is a chart showing the trend of Bitcoin funding rates for this platform over the past year and a half:
It looks like the value of the metric has been quite red in recent days | Source: CryptoQuant
As shown in the chart above, Bitcoin funding rates on the BitMEX exchange have recently plummeted to deep negative levels. This means that a large number of short contracts accumulate on the platform compared to long contracts.
As a rule, when the futures market becomes too unbalanced in one direction, it becomes more likely that the price will move sharply in the opposite direction that investors are betting heavily on.
This is because a mass liquidation event, referred to as a “squeeze”, is usually more likely to occur towards the party with more open contracts. In a squeeze, price fluctuations cause a large number of simultaneous liquidations, and these liquidations end up only fueling said movement in response. A cascade of liquidations can then occur due to this increased price action.
With funding rates on BitMEX now heavily skewed to the negative, a short squeeze is possible in the near future. The chart shows that the indicator showed a similar trend only at the beginning of the year.
This negative surge in March occurred when the price of Bitcoin fell below the $20,000 level, but these red readings were only temporary as there was a short squeeze shortly after that led to an impressive BTC recovery.
After the collapse of FTX in November 2022, the metric showed even more negative values, but after them the price did not undergo a noticeable increase. However, Bitcoin has still seen a bottom, coinciding with BitMEX’s red funding rates.
It remains to be seen now whether the pattern seen in March 2022 will repeat itself this time as BTC sees a short squeeze that reverses the current decline.
At the time of writing, Bitcoin is trading around $27,500, down 4% over the past week.
BTC seems to have plummeted in the last couple of days | Source: BTCUSD on TradingView