21 April, 2024



Bitcoin vs. Ethereum: Funding Rates Signal a Shift in Risk Appetite

28 Feb, 2024

04 Mar, 2024

  • Bitcoin-Ethereum annual funding rate/spread dips 9% raising traders’ interest in Altcoins.
  • High Bitcoin perpetual futures funding rates create attractive arbitrage chances for traders exploiting price discrepancies.
  • Bitcoin’s upward momentum amplified as short sellers faced over $465 million in liquidations underestimating its growth potential.

Analysis of the spread between Bitcoin and Ethereum perpetual funding rates revealed a key insight. This spread which reflects the cost of holding leveraged long or short positions in each cryptocurrency has dipped to an annualized -9%. 

This indicates that investors are more willing to pay a premium to hold leveraged long positions in Ethereum compared to Bitcoin. Additionally, the high funding rates in Bitcoin perpetual futures present attractive arbitrage opportunities for traders who can exploit the discrepancy between perpetual and spot market prices.

Perpetuals and futures without expiry have implemented a funding rate mechanism resulting in prices closely following spot prices. In this mechanism a positive funding rate is indicative of leverage skewed toward the bullish side with long position holders willing to pay shorts to keep their bets open. Conversely, a negative rate suggests the opposite.

Recent reports have indicated that the bitcoin-ether funding rate spread has remained within the range of -3% (lower bound) and +3% (upper bound) throughout the first nine months of 2023. However, since October, this spread has seen several brief drops below -3% which is signaling a bias towards ether and the wider altcoin market.

Source: Glassnode

Bitcoin (BTC) has experienced a significant price surge in recent weeks reaching its highest level since December 2021 and approaching $57,000. This upward trend is attributed to a combination of factors including increased investor risk appetite, a squeeze on short sellers and the emergence of new arbitrage opportunities in derivatives markets.

Data from on-chain analytics platforms like Glassnode reveals an increase in capital flowing back into the Bitcoin market. The Realized Cap which measures the total USD value ever invested in Bitcoin is approaching its all-time high. 

Source: Glassnode

This suggests a renewed sense of confidence among investors particularly short-term holders who are known for their more speculative trading behavior. Exchange inflow data indicates that these short-term holders are actively depositing funds exceeding $2 billion daily.

Investors betting against the recent Bitcoin price rise, known as short sellers, have faced significant losses. Over the past month liquidations have exceeded $465 million indicating that the market may be underestimating Bitcoin’s potential for further growth. This squeeze on short sellers further amplifies the upward price momentum.

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