Bitcoin Futures Traders Turn Bearish, Signaling Capitulation

The Practice of Buying Bitcoin (BTC) as collateral to sell at a higher price in the future could near the end as the price of the cryptocurrency falls, marking a shift in investor sentiment from bullish to a bear.

“Futures traders have started to value Bitcoin contracts that expire in three months almost at the same rate as the current spot price,” wrote the Norwegian cryptocurrency analysis company Arcane Research on Tuesday in a report.

The falling futures premium suggests uncertainty about the future direction of Bitcoin after a 35% correction in May and a further drop of 12% earlier this month.

“This indicates a rather bearish sentiment among futures traders,” said Arcane.

A change in sentiment is particularly important in the crypto futures markets, according to Max Boonen, director and founder of B2C2, a London-based cryptocurrency market maker.

“This is different from conventional markets such as [foreign exchange]where spot and forward prices are closely linked by central bank-set levels, ”Boonen wrote in an email to CoinDesk.

The bitcoin carry trade dissolves

“Many investors have played the cash-and-carry trade – shorting futures and long spots to profit from a narrowing of the base,” said David Grider, strategist at FundStrat, in an email to CoinDesk.

Arbitrage trading has lost its appeal as the Bitcoin futures curve has flattened out over the past few months.

Contango, a term used to describe bullish arbitrage, occurs when the Bitcoin futures price is higher than the spot price. Bitcoin’s contango has narrowed since April as bullish sentiment subsided.

The chart shows the three month BTC futures basis across the exchanges, which shows the relative difference between the price of the futures contract and the spot price over an annual time frame.
Source: Arcane research

The one-month Bitcoin futures contract has already moved into backwardation, which means that the futures price is lower than the spot price. This is another bearish signal.

Bitcoin funding rate turns negative

Arcane Research also pointed to the negative funding rate for Bitcoin Perpetual Swaps as a sign that short traders are in control.

Perpetual swaps are a type of derivative in cryptocurrency markets that are used to bet on future prices, much like futures contracts in traditional commodity markets. A negative funding rate means that traders who are short – bet on further price declines – traders who are long or bullish are paying for leverage.

The chart shows the Bitcoin funding rate turned negative, suggesting that shorts are paying longs to build positions.
Source: Arcane research

“To cut a long story short: the cops were frightened, and Diamond hands turned out to be made of coal, ”Nathan Cox, chief investment officer at Two prime, a digital asset investment manager, in an email to CoinDesk.

However, a negative funding rate can be a contrary signal.

“It is more likely that we will liquidate short positions, which can lead to what is known as a short squeeze and push [the] Price higher again, ”wrote Arcane Research.

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