The analyst explained that the latest cooldown in the Ethereum futures market could indicate the possibility of ETH prices resuming their rise.
Ethereum funding rates have dropped recently
An analyst in a CryptoQuant Quicktake post explained that ETH funding rates have declined from their previously overheated levels. “Funding Rate” refers to the periodic fees that holders of futures contracts on derivatives platforms currently exchange with each other.
When the value of this indicator is positive, it means that holders of long contracts are paying a premium to short ones to hold their positions. This trend means that most traders are now bullish.
On the other hand, a reading below zero indicates that bearish sentiment is currently prevailing in the futures market as short traders suppress long traders.
Now here is a chart that shows the trend in Ethereum funding rates over the past few months:
The indicator value appears to have been low in recent days |Source: CryptoQuant
As shown in the chart above, Ethereum funding rates have been mostly positive over the past few months, meaning traders in the futures market are mostly bullish on the asset.
The few times the indicator fell into negative territory during this period, it did not bring anything serious, as the indicator only reached low red values and returned back to the green zone without much anticipation.
The chart shows that at some points during this long period of bullish sentiment the indicator reached particularly high levels. “However, it is important to note that elevated funding rates raise concerns about potential overheating in perpetual markets, signaling the possibility of a looming secular squeeze event,” the quantitative expert said.
A “squeeze” is an event in which a sharp price swing causes a large number of liquidations, which in turn fuel that price movement, prolonging it and causing further liquidations.
When such a cascade of liquidations affects the long side of the market (that is, the price movement in question is a rapid drawdown), the event is known as a “long squeeze.”
Typically, the part of the futures market that is most dominated by traders is the one that is most likely to fall victim to a squeeze. Thus, when funding rates are very positive, a prolonged squeeze may be more likely.
However, recently, when Ethereum underwent another correction, funding rates also changed. While they are still positive, their magnitude can no longer be attributed to an overheated market and thus the risk of a prolonged squeeze would be reduced.
“Therefore, there is a possibility that the price will resume its upward trajectory after the ongoing correction phase ends,” explains the analyst.
Ethereum is down about 5% over the past week as its price has now fallen below $2,400.
The price of the coin seems to be falling recently |Source: ETHUSD on TradingView.