Bitcoin (btc) The overnight pullback from new highs removed excess leverage from the market, normalizing funding rates in the cryptocurrency futures market.
The leading cryptocurrency by market cap fell 10% to $59,700 after hitting a new all-time high above $69,000. The correction led to the forced closure of $1 billion worth of leveraged perpetual futures bets across digital asset markets.
The CoinDesk 20 (CD20), a broader measure of the market, rose to a high of $2,627 on Tuesday and has since retreated to $2,496.
Since then, annual funding rates, or the cost of holding leveraged bets in perpetual futures contracts tied to the top 25 cryptocurrencies, have reset to below 20%, down significantly from the triple-digit numbers observed a few days ago.
In other words, the overheated perpetual futures market has cooled, opening the doors to a longer-term move toward record highs. Funding rates surged above 100% early this week, as Bitcoin's strong bullish momentum saw investors jumping in, using leveraged products to maximize gains.
Exchanges use a funding rate mechanism to keep perpetual prices in line with spot prices. A positive funding ratio indicates that perpetual shares are trading at a premium to the spot price, indicating increased demand for bullish bets. As such, a high funding rate, as seen at the beginning of this week, is said to reflect excessive optimism, which is often observed at temporary market peaks.
A chart prepared by Velo Data shows that funding rates for the top 25 cryptocurrencies ranged from somewhat positive to 150% or more over the past week.
The latest reading for most currencies is less than 20%.
According to John Glover, chief investment officer at Ledn, the market could continue to deleverage in the coming weeks, which could push the price of Bitcoin towards $40,000.
“The euphoria surrounding the recent rise in Bitcoin prices is very reminiscent of the last time we were trading at $65,000. While many people will point to the fact that the sell-off following November 2021 (and previously after April 2021) was due to bad market players, However, I contend that although it may have been precipitated by bad players, the sell-off was due to people becoming overly leveraged with unrealistic expectations of the fixed installment rising to $100,000, Glover said in an email.
“I think we are back in the same boat and we will see a correction back to the mid-to-low $40,000 area in the coming weeks. Things always look bullish at the peak,” Glover added.
