The recent 4% drop in the price of Bitcoin to $42,000 has had a significant impact on the crypto perpetual futures market, cooling what was deemed an overheated market. This drop has cleared the way for a steady ascent into the year-end, according to industry experts.
Perpetual futures are futures contracts with no expiry date and a funding rate mechanism to tether their prices to the index price. These funding rates are periodic payments between long (buy) and short (sell) position holders, calculated and collected by exchanges every eight hours. A positive funding rate indicates that the perpetual contract is trading at a premium to spot prices, with long positions dominant and paying shorts to keep their positions open. Conversely, a negative rate suggests the opposite.
In the second half of last week, funding rates for major cryptocurrencies such as BTC and ETH consistently tapped the 0.15% mark, signaling an overleveraged market. However, with the recent market-wide price drop in the early Asian session, funding rates for most coins have now normalized to a healthy territory below 0.1%.
This adjustment in funding rates indicates that overleveraged traders have been shaken out of the market. When momentum stalls, the costs associated with leverage become burdensome, forcing overleveraged traders to exit their positions and causing a minor hiccup in the market dynamics.
The decline in the notional open interest, or the dollar value locked in open crypto futures contracts, further supports this narrative. Various cryptocurrencies such as XLM, UNI, LINK, and XMR have shown a double-digit slide in open interest over the past 24 hours. Additionally, open interest in Bitcoin and Ethereum has also decreased by 1.3% and 6.7%, respectively.
Overall, the recent price drop in the crypto market has led to a recalibration of funding rates and a decline in open interest, suggesting a shift towards a healthier market environment. This development may pave the way for a more stable and sustainable growth trajectory for cryptocurrencies as the year draws to a close.