As shorts launched a massive offensive over the weekend, the funding rates in the cryptocurrency derivatives market plummeted to their lowest level since the depths of the 2022 bear market.
On-chain analytics provider Glassnode reported the sharp decline in funding rates on Sunday.
"This marks one of the most severe leverage resets in cryptocurrency history," analysts noted, indicating that this clearly demonstrates "how excessive speculation is being aggressively cleared from the system."
Funding rates are the periodic payments between traders in the most popular cryptocurrency derivatives—perpetual futures contracts. They are designed to keep the price of perpetual contracts anchored to the spot price.
When funding rates are extremely low or negative, there are more short positions than long positions, which is often a signal that derivatives speculators expect prices to fall, thus they are willing to pay to hold short positions.
However, extremely low funding rates, like the current situation, can actually be bullish, as the market may be oversold, and an excess of shorts could create the potential for a "short squeeze" if prices begin to rise.
This seems to be the current situation, as the CoinGlass long-short ratio has turned bullish. About 54% of sentiment is bullish or very bullish, 16% remains neutral, and 29% is still bearish.
CoinGlass also reported that long accounts currently account for 60%, while 40% are still shorting.
However, according to CoinGlass data, the funding rates for Bitcoin (BTC) and Ethereum (ETH) perpetual swaps are still slightly negative.
The spot market has seen a strong recovery, with BTC rising over 5% since dropping below $110,000 on Sunday, while Ethereum has rebounded 12% since falling below $3,800.
In what some are calling the "Black Friday of cryptocurrency," the largest leverage washout in cryptocurrency history saw nearly $1 trillion in total market capitalization drop by 25% in just a few hours, according to TradingView data.
When U.S. President Donald Trump announced the latest round of tariffs on China on Friday, whales anticipated a drop and built up significant short positions. When the waterfall hit, 1.6 million traders holding leveraged long positions were liquidated.
The trading volume was so strong that Bitcoin experienced its first-ever $20,000 red candlestick, with a market cap drop of $380 billion, "then a V-shaped bottom appeared as shorts were covered," reported the Kobeissi Letter on Sunday.
This was not only the largest liquidation in history but also nine times greater than the previous record. Leverage washouts are a common phenomenon in the market, helping to reset the market after excessive accumulation of cryptocurrency derivatives speculation.
Related: Explanation of the "de-pegging" of USDe on Binance focuses on coordinated attacks and oracle issues
Original: “Cryptocurrency Derivatives Funding Rates Hit 3-Year Low: Bullish Signal?”
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