Highly Leveraged Bets from Traders Led to Open Interest Surging to $35 Billion
Crypto futures funding rates have begun to return to normal levels after a period of high fees caused by traders paying to maintain long positions. This movement comes after a surge in open interest over the weekend, which reached $35 billion. This indicates that traders were making highly leveraged bets in anticipation of even higher prices.
The high funding rates meant that traders were paying between 0.2% and 0.5% every eight hours to keep their long positions open. This resulted in speculators paying as much as 50 cents to exchanges for every $100 they had in a position.
Some market watchers warned that this situation could lead to a sharp sell-off, as traders would be more inclined to go short or bet against rising prices. This is because short positions earn fees from long positions when funding is positive.
The recent market drop is likely the result of this dynamic, as traders took profits after a week-long rally. Nearly 90% of bullish bets were liquidated, totaling over $300 million. Bitcoin traders lost $120 million, while Ether traders lost $63 million. XRP and Solana’s SOL-tracked crypto futures also saw 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 trader’s initial margin. This happens when a trader is unable to meet the margin requirements for a leveraged position, effectively meaning they do not have enough funds to keep the trade open.
Large liquidations can signal the peak or trough of a significant price movement. As a result, funding rates have returned to normal levels, averaging around 0.01% on most exchanges as of Wednesday morning.
Crypto markets have gained over 6% in the past week, fueled by increased expectations of a spot Bitcoin exchange-traded fund (ETF) being approved in the United States. Some analysts have reiterated that there is a 90% chance of this happening in January.
In related news, traditional finance giant BlackRock has filed for an Ether (ETH) ETF, which has boosted the token’s price. Other alternative cryptocurrencies, such as Avalanche, Solana, and Polygon, have also seen gains.