Over the past week, Bitcoin (BTC) has found itself in a steep rise higher, rallying from $9,100 to as high as $9,850 — a gain of 8.2% — in the span of four days.
Although this sort of price action isn’t abnormal for the leading cryptocurrency, it has been underscored by a growing sense of euphoria in the markets. Indeed, social volumes for Bitcoin are through the roof, influencers are out touting bullish sentiment, and there is an overall air of the fear of missing out (FOMO) within the industry.
Case in point, BitMEX’s funding rate — the rate that long position holders pay short positions (or vice-versa) every eight hours — has moved far into negative territory, suggesting that the price of BTC is in for a steep drawdown, an analysis indicates.
What’s the BitMEX Funding Rate?
While a bit more complicated than the following, the BitMEX funding rate is effectively determined by how far the price of Bitcoin on BitMEX is trading over the “mark” price, the index price of BTC determined by aggregating data off the exchanges.
In uptrends, Bitcoin most often trades at a relatively strong premium compared to spot exchanges like Coinbase, as investors try and utilize leverage to make the most of rallies. In downtrends, the opposite is true.
Bitcoin Will Soon Drop 7%, the Funding Rate Predicts
The aforementioned trend was proven true late on Wednesday of this week when Bitcoin, after spiking to $9,700 from $9,100 in a day’s time, printed a funding rate of 0.14% every eight hours. The rate was only this high for a few hours, though it showed how exuberant the market was.
The relatively high funding rate has been underscored by strong capital inflows for BitMEX. Jai Prasad at Token Analyst and Seed Invest, two crypto startups, posted data indicating that February 5th was the “largest netflow (inflow-outflow) [of Bitcoin into BitMEX] day of the year.”
According to a recent analysis shared by economist and crypto analyst Alex Krüger, Bitcoin printing a funding rate of above 0.12% (equates to a crazy 131% when annualized) has historically been a precursor to relatively large drops.
More specifically, every time the aforementioned funding rate was seen, Bitcoin dropped an average of 7% in the five days that followed. Yes, there are exceptions to this trend (like in the early-2019 mania), though the clear trend is high funding rates are often precursors to a precipitous decline.
This boxplot shows what happens with bitcoin's price when Bitmex funding reaches levels as extreme as today's.
Bitmex funding can be used as a proxy for traders positioning.
Mean return after 5 days has been -7%.
— Alex Krüger (@krugermacro) February 7, 2020
Should Bitcoin follow the historical average perfectly, that means around Monday, the price of BTC will be $9,000 flat, far lower than where it is now.
A move to this level would likely open up the cryptocurrency market to an even bigger correction, for that would mean the strong uptrend BTC has formed over the past few weeks will have been seriously violated.
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