💸The relationship between the price of a currency and the negative funding rate is generally associated with the behavior of traders in futures or derivatives markets, such as perpetual swap contracts. Let's detail:
What is the financing rate?
The funding rate is a mechanism used in derivatives contracts (especially perpetual futures) to keep the price of these contracts aligned with the price of the asset in the spot market. This rate is paid between market participants:
Long positions pay short positions when the funding rate is positive.
Short positions pay long positions when the rate is negative.
The rate is adjusted regularly (usually every 8 hours) and is influenced by the imbalance between demand for long and short positions.
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Why does currency price rise with negative funding rate?
1. Greater pressure to close short positions:
When the funding rate is negative, traders who are short have to pay to maintain their positions. This creates an incentive for them to close out their positions (buying the currency back). This buying movement can lead to an increase in the price.
2. Sign of too much shorts:
Negative funding rates indicate that there is an excess of short positions in the market. If many traders are short, any positive event or sentiment can trigger a short squeeze, forcing shorts to close quickly and causing the price to rise.
3. Expectation of sentiment reversal:
When the market is oversold, it is common for traders to speculate on a reversal (bullish). This is because oversold markets often indicate that the asset is "discounted", increasing the interest of buyers who believe in an upward movement.
4. Demand for arbitration:
Arbitrageurs may enter the market to profit from imbalances. For example, if the price in the futures market is significantly lower than the spot market, these traders buy in the futures market and sell in the spot market, correcting the prices and increasing the price in the future.
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Practical example:
If Bitcoin has a negative funding rate of -0.05%, this means that shorts are paying to hold their positions. If the spot price of Bitcoin starts to rise for any reason, shorts may be forced to buy Bitcoin (close positions), causing the price to rise.
This mechanism reflects the balance of forces in the market and how sentiment can change quickly based on the cost of holding a position.
