ssavi

Funding Rates in The Crypto market

Education
INDEX:BTCUSD   Bitcoin / U.S. Dollar
Why is the funding rate so important and significant in the cryptocurrency market?

Funding rates are the costs to hold a position in the futures and options market. I visualize it as a sort of interest rate component within the funding rate. As the amount of longs surpasses the amount of shorts, longs are going to pay interest (funding rate) to the shorts, and vice versa.

To answer the question, I first want to explain why I use funding rates and liquidations as an extra hedge indication for my trading.

Thankfully today we have easy access to resources such as "https://www.coinglass.com" which depicts real-time funding rates and liquidations for free. This indicates a couple of important things to incorporate when trading with the trend. I make three different analyses every day to understand whether the futures /options traders are more bullish or bearish .

1. I look at the funding rates of $BTC and major alt-coins. This indicates the direction people believe the market will move (sentiment) and by how much. https://www.coinglass.com/FundingRate
2. I look at the liquidation data to fundamentally understand what is happening in the futures market and compare it with current prices. For example, if in the past hour there was an unusual amount of long liquidations and I see a sudden downward move in price I can tell that the move may have been due to liquidity issues from liquidation. As people liquidate, their contract sells at market price, and when there is too much liquidation there can be liquidity problems and prices make sudden moves. This can be defined as an imbalance of orders. In the highly leveraged market of cryptocurrencies, this happens practically every day.
3. Using technical analysis , I analyze the trend divergences and confluences along with the funding rate. For example, if the market is trending down but the funding rate is positive, the longs are consistently taking up the offers that sellers are providing but the market is not resolving in the direction of the longs. This is not an environment that I want to long because longs are going to be pressured by their positions that are moving towards losses. These divergences can cause impulsive moves in price.

As previously mentioned, the crypto market is highly leveraged, and such indications hedge me in my trading.

This is for personal recording only