Impact of Declining Cryptocurrency Funding Rates on Bitcoin and Ethereum

CoinBureau reports:
The cryptocurrency financing rates of Bitcoin and Ethereum have dropped significantly in the past few days. During this period, the implied volatility of Bitcoin and Ethereum has surged.
Bitcoin (BTC) and Ethereum (ETH) holders have been severely affected by the recent market downturn. However, it is not only holders who are affected.
Low financing rates
The financing rates of Bitcoin and Ethereum have both dropped significantly in the past few days. Negative cryptocurrency financing rates may lead some investors to believe that a price drop is imminent, encouraging them to sell their holdings or short them.
This selling pressure could result in an actual price drop for Bitcoin and Ethereum.
The attractiveness of holding long-term futures contracts is reduced due to negative funding rates. These costs erode potential profits, causing some traders to unwind their long positions or be more cautious in opening new positions.
This reduces overall buying pressure, which could weaken the price support for BTC and ETH.
A shift in sentiment could lead to higher volatility in the short term. With the tug-of-war between long and short positions, price fluctuations for Bitcoin and Ethereum may become more pronounced.
Conversely, a significant and sustained decrease in financing rates may be seen as a contrarian indicator by some investors.
They might view it as a sign of oversold conditions, providing potential buying opportunities for BTC and ETH at what they perceive to be discounted prices.
As of the writing of this article, traders are slightly bullish on Bitcoin, as long positions ultimately outweigh short positions, accounting for 50.7% of all trades.
Similarly, bullish sentiment for Ethereum has seen a similar increase, with the proportion of long positions in ETH growing by 50.9%.
IV grows with price volatility
During this period, the implied volatility of Bitcoin and Ethereum has also increased. The increase in IV suggests that options traders see a higher likelihood of significant price fluctuations in the future for Bitcoin and Ethereum.
Read Bitcoin’s [BTC] price forecast for 2024-25
This indicates that uncertainty about the future direction of the market is increasing. If market sentiment sharply turns bearish, negative funding could amplify the price decline caused by increased short selling.
Conversely, a sudden positive shift could lead to more significant price increases due to higher volatility.