Bitcoin’s price broke its all-time high and surpassed $24,600 as traders analyze what’s coming next.
Bitcoin’s price broke its Christmas high, reaching $24,681 on Binance. After the strong rebound at BTC, traders and analysts are exploring both up and down markets in the short term.
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Market sentiment around Bitcoin Lifestyle remains overwhelmingly positive, but analysts are raising some concerns for the foreseeable future and, as a result, the next move is not clear.
The funding rate for Bitcoin futures
Bitcoin (BTC) has risen above $24,600 with a small stranglehold on short positions. In the last four hours, only $95 million worth of short contracts were settled, suggesting that this rally wasn’t caused by a short position bottleneck. A short position bottleneck occurs when many short contracts or sell orders are liquidated in the futures market. This occurs when sell orders are over leveraged, which means traders are aggressively selling Bitcoin with borrowed capital.
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Since the rally has not been triggered by a shorting, the futures market has been dominated by buyers and holders of long contracts. This trend led to the funding rate on Bitcoin’s major futures exchanges reaching 0.1%. The funding rate is a mechanism used by futures exchanges to incentivize holders of long or short contracts based on market sentiment. If there are more long contracts, the financing rate becomes positive, which means that buyers must incentivize sellers.
The average funding rate of the Bitcoin futures contract on most exchanges is 0.01%. When the funding rate is 0.01%, the trader has to pay 0.01% of his position as an incentive to short sellers, who are the minority in the market. However, when the financing rate goes up and traders who buy Bitcoin have to pay large financing rates, it becomes less attractive to go long on Bitcoin.
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Currently, on December 25, 2020, the financing rate of Bitcoin futures is 0.1%. As such, traders and strategists say that Bitcoin is at risk of reversal because it has become less attractive, at least in the short term. Mohit Sorout, the founding partner of Bitazu Capital, pointed to Bitcoin’s extremely high funding rate to suggest that a reversal is likely: „I’d be very surprised if USDbtc were to continue to rise from here.
Edward Morra, a trader in crypto derivatives, echoed a similar sentiment. He added that many traders in the futures market started going long and buying Bitcoin after it reached $24,400. After the drop, Morra expects the funding rate to be restored after a local correction. Morra tweeted, „Derivatives traders weren’t buying the fall, they were buying the upside again, classic. Now, spot chads will eliminate them, send premiums and funding to the baseline and continue after a local correction“.
However, some traders do not agree that the rate of futures financing is of paramount importance during a strong bullish run. Salsa Tekila, a pseudonymous Bitcoin trader, noted that the BTC funding rate reached 0.375% in the 2017 bull market. Considering that the price is much higher, but arguably at an earlier stage of the rally, the trader said that the funding rate alone may not be accurate in predicting a ceiling:
„Going short during the uptrend of price discovery based solely on funding while expecting a cap from Wyckoff seems extremely stupid to me. Funding was 0.375 (high) for weeks in the 2017 uptrend.
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Given Bitcoin’s previous historical price cycle, traders are more cautious about predicting a spike in the short term. This leads to the bullish case for BTC in the foreseeable future, which revolves around the theory that during a bull market, historical trends may not repeat themselves.