Glassnode Series: BTC Futures Perpetual Funding Rate (FPFR) Analysis — AAX Academy

What is FPFR?

FPFR is the mechanism used in order to ensure that the futures contract’s price stays close to the index or mark price. In order to stay close to the index price traders will either pay the opposite position or be paid by them. This is a way to incentivize traders to position themselves such that it drives convergence.

The pay will depend on the general position taken. For example if most BTC futures contracts taken out are long, then those taking out a long will pay those shorting in order to keep BTC close to the index price. On the contrary, if the majority of traders are taking short positions, they will pay traders taking a long position in order to keep BTC near the index price. These payments are automatically executed (taken or added to the trader’s margin) every 8 hours.

When looking at exchange analysis we can utilise the funding rate in order to see the general positions / sentiment of traders. We can then come to the following conclusion:

• If the funding rate is positive — users are typically taking long positions and traders are overall bullish.
• If the funding rate is negative — users are typically taking short positions and traders are on the whole bearish.

The BTC current FPFR

In the chart below we can see BTCs FPFR over the past month. When the bar is green the funding rate is positive and negative with a red bar. From a quick glance this chart shows us that the overall trader sentiment for BTC has been bullish over the past month.

BTC FPFR 19/05/2021

Analysis of the past months FPFR

When analysing the FPFR there is one striking evaluation: traders seem to keep getting it wrong.

On the chart we can see that as BTC increases in price (grey line), so does the FPFR. Alongside this the FPFR highs are occurring at the BTC highs, while the most recent negative FPFR occurred at the bottom.

Traders on the whole have not been successful with their chart work this month (based on FPFR assessment). On AAX YouTube, BTC was identified before the crash, however many traders did not pick up on the bearish outlook. When looking at the four largest futures exchanges (by 24hr volume) we can see that traders inaccurately projected the price direction for Bitcoin.

Futures volume 24hr, largest exchanges

BTC funding rates positive on Binance, OKEx, FTX & Huobi — BTC then loses 20% value over the following 24hrs

Individual FPFR exchange analysis

In the chart below we can see that exchange funding rates vary. For example when looking at Kraken, we can see that traders have more accurately judged the market than OKEx. What we can see is that apart from Kraken, FPFR rates were mostly positive on 18/05/2021.

Individual exchange FPFR

Why were traders mostly positive?

When digging into traditional TA, it seems that most traders were placing longs for two main reasons…

1 — Firstly BTC was moving within a descending wedge. When BTC is within a descending wedge it typically breaks towards the upside, this was seen in February and April. Therefore traders likely were not patient and placed their long before the breakout occurred. This resulted in the funding rate being positive.

What traders were likely expecting (green arrow)

2 — Indicators were displaying oversold signals. When these are displayed a cryptocurrency typically sees a bounce. Expecting a bounce traders likely placed a long. For example in the image below we can see that BTC did not bounce off the 30 RSI level. Since the March 2020 crash BTC has bounced every time — except this time.

Indicators oversold — most notably RSI

3 — RSI divergence expected. In April, BTC saw similar price action to this month. Many traders were expecting a bullish RSI divergence. Therefore, many traders likely jumped the gun in an attempt to catch the bottom, rather than waiting for the final bullish divergence confirmation. As shown below, the bullish divergence did not take place, with BTC also falling below the key support line.

Failed bullish RSI divergence for BTC/USDT

Conclusions

From looking at the FPFR we can learn more about sentiment. However, bullish sentiment does not automatically mean price appreciation. Instead, if the FPFR displays an exponential rise, it could suggest that a cryptocurrency is overbought and is due a retrace.

Originally published at https://academy.aaxpro.com on May 20, 2021.