Written by

Vetle Lunde

Senior Analyst

27 Sep 2022

Funding rates neutral, open interest to new highs

No sign of relief in futures

Futures premiums remain extremely low, as the morning recovery contributes little to improving the market risk appetite.

CME traded most of the last week in backwardation, caused by growing inflows to BITI, as traders positioned for further downside in BTC.

No sign of relief in futures

Futures premiums remain extremely low, as the morning recovery contributes little to improving the market risk appetite.

CME traded most of the last week in backwardation, caused by growing inflows to BITI, as traders positioned for further downside in BTC.

Source: Skew, Laevitas, Tradingview, CME
*Closed Saturday - Sunday

The offshore basis has stayed flat over the last week, seeing a slight premium of 1%.

In sum, there are few notable changing tendencies in the futures market. Premiums remain extremely low, and the general risk appetite in the market stays muted.

Tuesday morning strength sends funding rates to neutral levels

Funding rates are neutral for the first time since September 13th.

Source: Skew, Bybit, Binance

Perps saw funding rates reach neutral levels for the first time in two weeks during the early Tuesday recovery.

With BTC oscillating at $19k, funding rates predominantly stayed negative, as few traders were willing to add long exposure, leading perps to trade at a discount to spot continuously.

Some have noted that the Tuesday move seems to be fueled by a short squeeze. However, available data suggests that a short squeeze did not cause this move. Per Coinglass, $26m worth of shorts have been liquidated in BTC so far today, on par with the average short liquidation volumes in recent weeks.

Binance and Bybit have reduced access to liquidation data, so Coinglass’ data understates the actual liquidation volumes. Still, Binance’s OI has grown amid the early hours today, as has Bybit’s. Thus, this move seems not to be fueled by shorts getting squeezed but rather more longs entering the market or a spot-driven reaction.

Funding rates have mostly been negative since the crypto credit crisis in June and have been neutral to below neutral since December 4th, 2021.

Still, as we illustrate below, while the perp regime bears a resemblance to the 2018 bear market, it’s also very different. The prolonged neutral to below neutral regime differs from 2018, but funding rates have also reached far less extreme lows now compared to the 2018 bear market.

BTC denominated open interest at all-time high

Source: Laevitas

The BTC-denominated open interest has surged to a new all-time high today of 424,000 BTC, after BTC’s recovery above $20,000. This, in addition to muted liquidation data, indicates that the recent move bears few signs of a substantial short squeeze.

A different kind of bear market?

Comparing 2018 funding rates to the current regime

Perps behave very differently during the 2022 bear market compared to 2018. In 2018, funding rates periodically pushed above neutral levels, while the negative extremes were far lower than in the current bear market.

Source: Skew, BitMEX
*3 Funding Periods per day

Funding rates on Binance have remained neutral to below neutral since December 4th. But how does the current funding regime compare to the 2018 bear cycle? We compare accumulated funding rates from the 2017 cycle peak to the funding rates from the 2021 cycle peak.

Since November 10th, a short in Binance’s BTCUSDT perp would’ve yielded 5.26% to shorts. In other words, while funding rates have never been above neutral, longs have still paid shorts.

BitMEX dominated the derivatives market in 2018. 318 days after the 2017 peak, the accumulated BitMEX funding rates reached -0.46%, albeit in a far more volatile manner compared to the funding rate regime of today. Thus, during the 2018 bear, shorts tended to pay longs on aggregate.

Derivatives are complex, and funding calculations vary across derivatives instruments, and in this instance, even the collateral structure of the derivatives. Thus, to compare like for like, we’ve included the 2022 funding rates of BitMEX’s inverse perp in the chart. Since the 2021 peak, BitMEX’s perps have yielded an accumulated funding rate of -1.46%, lower than the funding rates yielded in the first 318 days of the 2018 bear market.

Nevertheless, BitMEX currently represents 3.3% of the open interest in perps versus >50% in the 2018 bear market. BitMEX is less relevant than it once was.

BitMEX’s accumulated funding rates from the cycle peak bottomed at -12.15% in May 2019. Then, funding rates were far more extreme than today. While funding rates currently tend to float below neutral terrain, deeply negative funding rates of -0.375% were typical in the more nascent derivatives market in 2018 and 2019. More efficient market makers and a more efficient market in general likely contribute to less extreme downward pushes in funding rates, in addition to balancing funding rates at neutral levels of 0.01%.