Bitcoin's (BTC) overnight pullback from new record highs has removed excess leverage from the market and normalized funding rates in the crypto perpetual futures market.
The leading cryptocurrency by market value fell 10% to $59,700 after hitting a new lifetime high above $69,000. The correction resulted in the forced closure of $1 billion worth of leveraged perpetual futures bets in the digital asset markets.
The CoinDesk 20 Index (CD20), a broader market indicator, rose to a high of $2,627 on Tuesday and has since fallen back to $2,496.
Since then, annual funding rates, or the cost of holding leveraged bets in perpetual futures pegged to the top 25 cryptocurrencies, have declined to less than 20%, a significant decline from the triple-digit numbers observed a few days ago.
In other words, the overheated perpetual futures market has cooled, opening the door for a prolonged rise to record highs. Funding rates rose above 100% earlier this week as Bitcoin's strong bullish momentum caused investors to jump in with both feet and use leveraged products to maximize profits.
Exchanges use the funding rate mechanism to align perpetual bond prices with spot prices. A positive funding rate indicates that perpetual bonds are trading at a premium to the spot price, indicating increased demand for bullish bets. Therefore, a high funding rate such as that seen earlier this week is said to reflect excessive optimism often seen during interim market highs.
Velo Data's chart shows that funding rates for the top 25 cryptocurrencies ranged from slightly positive to 150% or more over the past week.
The current value for most coins is below 20%.
According to John Glover, chief investment officer at Ledn, the market could continue to deleverage in the coming weeks, potentially pushing Bitcoin price back to $40,000.
“The euphoria surrounding the recent rise in BTC prices is very reminiscent of the last time we traded at $65,000. While many people will point out that the sell-off that followed after November 2021 (and previously after April 2021) was due to bad market participants, I would argue that it may have been brought about by the bad market participants “that people were too heavily indebted and had unrealistic expectations of linear appreciation to $100,000,” Glover said in an email.
“I believe we are in the same situation again and will see a correction back to the mid-to-low $40,000s in the coming weeks.” It always looks bullish at the peak,” Glover added.