Funding rates on major token futures have started to return to normal levels after a recent rally forced traders to pay unusually high fees to sustain their long positions.
Amidst the recent surge in crypto prices, open interest in futures skyrocketed to over $35 billion, according to data by CoinGlass. This represents a nearly 40% increase from the end of October when open interest stood at $24 billion.
The Impact of Leveraged Positions
With the leveraged positions piling up, funding levels reached some of the highest levels seen in recent months. Funding rates are periodic payments made by traders based on the price difference between futures and spot markets.
“Traders were paying fees ranging from 0.2% to 0.5% every eight hours on their borrowed funds to maintain their long positions, which translated to speculators paying up to 50 cents to exchanges for every $100 position held”
However, some market observers warned of a potential market downturn as traders were increasingly incentivized to take short positions or bet against further price increases.
Such positions would earn fees from those who were going long. In futures trading, when funding is positive, longs pay shorts, and the opposite occurs when funding is negative.
This situation likely contributed to the market drop witnessed on Tuesday, as traders took profits following a week-long upward trend, which led to nearly 90% of bullish bets being liquidated, totaling over $300 million.
Losses Incurred and Market Analysis
Bitcoin (BTC) traders alone lost $120 million as prices declined by 4%. Ethereum (ETH) traders faced losses of $63 million, while XRP and Solana’s SOL-tracked futures witnessed over $30 million in cumulative liquidations.
Liquidation occurs when an exchange forcibly closes a trader’s leveraged position due to a partial or total loss of the initial margin. It happens when a trader fails to meet the margin requirements to keep the trade open due to insufficient funds. Large-scale liquidations can indicate a potential turning point in a sharp price movement.
Consequently, funding rates have now returned to normal levels, averaging around 0.01% on most exchanges as of Wednesday morning.
The Rise of Chicago Mercantile Exchange (CME)
Last week, the regulated derivatives marketplace Chicago Mercantile Exchange (CME) dethroned Binance as the largest BTC futures exchange. CME now ranks first among futures and perpetual futures exchanges, boasting an open interest (OI) of approximately $3.85 billion, followed by Binance at $3.79 billion.
The reshuffling of rankings occurred amidst a major leverage flush out in the crypto market, driven by wild price swings. The volatility resulted in a $2 billion drop in aggregate Bitcoin open interest, which previously stood at $12 billion.
Notably, the decline had a more pronounced impact on Binance traders compared to participants in the CME market. Nevertheless, CME’s gradual ascent to the top position throughout this year underscores the growing demand from institutional market participants seeking to trade the largest and most established cryptocurrency.
