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Bitcoin’s funding rate has fallen to a pace not seen since September 2020, indicating investor panic.
Bitcoin (BTC) financing rates have fallen to lows not seen since September 2020, when the price of Bitcoin fell below $52,000 on April 18.
Lex Moskovski, a quant investor and researcher, believes it demonstrates that fear has returned to the economy.
According to Glassnode info, the average Bitcoin futures funding rate across all exchanges fell to about -0.03 percent on Sunday.
What is funding rate and why does it dropping matter?
To maintain market equilibrium, Bitcoin futures exchanges use a system known as “funding”
The process is straightforward: if there are more longs or sellers in the market, the financing cost increases, and vice versa.
As a result, when the financing rate falls below zero, it indicates that the bulk of the market is shorting Bitcoin, reflecting market panic.
“Wow, it’s been a long time since we’ve seen funding this negative. Fear.”
Bitcoin was trading near $64,000 earlier this week in advance of the Coinbase public listing. On April 18, at its lowest point of the day, BTC fell as low as $50,000.
From the day’s peak to the day’s bottom, the price of Bitcoin fell by almost 15% against the US dollar.
Since many traders use high leverage across major markets, investor sentiment will shift rapidly.
During the week of Coinbase’s public listing, the funding levels of Bitcoin remained steady at 0.1 percent to 0.15 percent on major futures exchanges such as Binance and Bybit.
This demonstrates that many traders were actively longing or purchasing Bitcoin, causing the futures market to become extremely overheated.
When this occurs, the motivation to short sell Bitcoin skyrockets, putting the economy at risk of a major liquidation.
Will Bitcoin recover soon?
Over the last 48 hours, there has been talk that the price collapse was caused by an abrupt drop in the hash rate of the Bitcoin blockchain network.
After blackouts in China’s Xinjiang province, big Chinese mining facilities and pools went offline on April 16.
As a result, Bitcoin’s hash rate fell rapidly, raising fears that it would damage investor sentiment against BTC.
However, Adam Cochran, a partner at Cinneanhaim Ventures, believes that the decline in Bitcoin hash rate did not cause the price of BTC to fall.
“The idea that a power outage last night in a mining region in China led to the dip in $BTC is utter nonsense, just like the spurious correlation graphs above. But even worse, when you run the math *there is no correlation* If someone is confident in a correlation and has enough data to make a graph, ask them for the receipts. If they have no idea how to run a regression test, then they don’t actually know if its correlated or not.”
If the Bitcoin price collapse was not exacerbated by fundamental forces, but rather by an overcrowded futures market, the argument for a quick rebound becomes stronger.
In the short term, Bitcoin is expected to trade below the $56,000 support level as the futures sector returns to normalcy and financing prices recover.