Bitcoin Funding Ratio Drops, Signaling a Possible Reversal
The funding ratio of Bitcoin (BTC) futures contracts has dropped significantly in the past few days, indicating that the market is cooling off and may be ready for a reversal.
According to data from CryptoQuant, a crypto analytics platform, the BTC funding rate rose to 0.049% on January 2, 2024, suggesting that long futures positions were overheating and creating a risk of a long squeeze. However, this drop has brought the funding rate down to 0.01% as of January 24, 2024, indicating that the market is more balanced and less prone to liquidations.
The funding ratio is a measure of the cost of holding a futures position. It is calculated by the difference between the perpetual contract price and the spot price, multiplied by a constant. A positive funding ratio means that longs pay shorts, and vice versa. A high funding ratio implies that the market is bullish and overleveraged, while a low or negative funding ratio implies that the market is bearish and underleveraged.
The fact that the funding ratio has been positive recently suggests that futures traders are still bullish on the market and are keeping their bets on the upside. Therefore, to end the BTC downtrend, we need to wait for a capitulation signal from market participants.
This is because for a downtrend to end, a large number of leveraged long positions must be liquidated and there must be no more volume left to sell. This would create a strong buying pressure and push the price up.
If the price sharp drop and the funding ratio becomes negative on the 1-hour chart, it could mean that leveraged traders are overly pessimistic about the market, which could be a good opportunity to buy back BTC.
At the time of writing, BTC is trading at $40,000, up 2.3% in the past 24 hours, according to CoinGecko.
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