Futures contracts trading has grown immensely over the past year, and proof of this comes from the total rise in open interest. Open interest is the total number of outstanding contracts, and the figure has risen from $3.9 billion to the current $21.5 billion in six months, a 450% increase.
Sometimes traders assume that a high or low funding rate and soaring open interest indicate a bullish market, but as Cointelegraph has explained before, this is not the case. This article will take a quick look at the funding rate and how traders interpret the metric when trading perpetual futures contracts.
The funding rate can be a bull and bear indicator
Perpetual contracts have an embedded rate usually charged every eight hours to ensure there are no exchange risk imbalances. Even though both buyers’ and sellers’ open interest is matched at all times, their leverage can vary.
When longs are demanding more leverage, they will be the ones paying the fee. Therefore, this situation is interpreted as bullish. The opposite holds when shorts are using more leverage, thus causing a negative funding rate.
Whenever traders use high levels of leverage, analysts point toTitle: 3 reasons why Bitcoin traders keep a close eye on the futures funding rate
Sourced From: cointelegraph.com/news/3-reasons-why-bitcoin-traders-keep-a-close-eye-on-the-futures-funding-rate
Published Date: Mon, 22 Mar 2021 21:30:00 +0000