Data shows that AAVE and Polygon (MATIC) traders are currently receiving up to 4.3% weekly on long futures contracts.
In cryptocurrency markets, traders are usually bullish, or at least most retail investors are. This creates an interesting phenomenon as arbitration tribunals and whales are encouraged to sell futures contracts while buying for cash on regular exchanges.
The graph above shows the incredible 240% gain in 2021 when the crypto market hit a total capitalization of $ 2.58 trillion on May 11th. The following week’s correction of 53% resulted in a low of $ 1.3 trillion, decimating the open interest in futures of $ 32 million.
Perpetual futures are automatically rebalanced every day
In contrast to regular monthly contracts, the prices for perpetual futures are very similar to regular cash exchanges. This makes life a lot easier for retailers who no longer have to charge the futures premium or have to manually extend positions shortly before they expire.
The financing fee enables this magic, and longs (buyers) are charged when they need more leverage. However, if the situation is reversed and the short positions (sellers) are excessively leveraged, the funding rate becomes negative and they pay the rate.
Note that for the past three months, AAVE has had a positive funding rate in most cases, with a few isolated cases of 8 hours. The typical situation implies that leveraged longs pay the rate that is between 0% and 0.30% per 8 hour period, which is 6.5% per week.
On May 19th, when the cryptocurrency markets collapsed, Open positions on AAVE futures fell from $ 200 million to $ 82 million.As long as longs closed their positions with stop orders or were forcibly liquidated.
After a few days of trying to stabilize, the 8-hour funding rate for perpetual contracts is currently at a negative 0.10%, which equates to 2.1% per week. In this situation, those who sell short (sellers) pay the fee, which creates an incentive for buyers.
A similar pattern was seen in Polygon (MATIC), which lost 62% on May 19 after hitting an all-time high of $ 2.70 the day before.
At MATIC there were 8-hour periods with negative financing rates of 0.20% and less, which corresponds to 4.3% per week. Although this rate fluctuates widely, there is pressure on short sellers to close out their positions as this reduces their margins.
This opportunity is usually short-lived
A negative financing rate creates a safety net for buyers as there are incentives to muster strength and try to curb the sellers’ brief bottlenecks.
This is why some analysts refer to the negative financing rate as a buying indicator. However, as soon as the short positions close their positions, the situation tends to even out and the funding rate neutralizes.
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