Bitcoin (BTC) futures contracts experienced a surge in short positions on April 18, leading to speculation of a bearish trend. This was influenced by the lack of inflows into spot Bitcoin exchange-traded funds (ETFs) and expectations of rising interest rates in the U.S., resulting in a negative market sentiment.
Retail traders often prefer perpetual futures, a derivative that closely mirrors the price movements of regular spot markets. Exchanges implement a fee called the funding rate every eight hours to maintain balanced risk exposure.
The funding rate becomes positive when buyers (longs) demand more leverage and negative when sellers (shorts) seek additional leverage. Typically, a neutral funding rate is around 0.025 per 8-hour period or 0.5% weekly. Negative funding rates are seen as highly bearish indicators, although they are infrequent.
The BTC funding rate turned negative on April 15 and again on April 18, reaching the lowest levels in over six months. This indicates a reduced interest in long positions. This shift in market sentiment becomes evident after significant price movements, such as the 13.5% decrease in Bitcoin’s price between April 12 and April 18.
Market dynamics show that the strongest impacts occur when bearish sentiment intensifies. For example, some analysts interpret the double-top formation at $72,000 as a sign that the downtrend could continue until June.
From a broader economic perspective, recent U.S. data showing higher-than-expected inflation and strong retail sales have reduced investors’ aversion to risk. The Consumer Price Index rose 3.8% annually in March, surpassing the Fed’s 2% target, with retail sales also up by 0.7% year-over-year.
A thriving economy reduces the likelihood of the Federal Reserve lowering interest rates, which favors fixed-income investments. Despite concerns over financial strains among lower-income households, a strong labor market has supported consumer spending.
The flow of funds into Bitcoin spot ETFs also influences market sentiment. On April 17, there was a net outflow of $165 million from spot Bitcoin ETFs, marking the fourth consecutive day of withdrawals. This is in contrast to early April when these ETFs attracted $484 million despite outflows from the Grayscale GBTC fund.
Data suggests that Bitcoin bulls may have scaled back on leverage after a period of optimism. In March 2024, there were seven instances where the funding rate exceeded 1.2% per week, resulting in extreme volatility and significant liquidations.
To gain a better understanding of market sentiment, traders should also observe the Bitcoin options markets, where a growing demand for put options typically signals neutral-to-bearish price strategies.
Recent data indicates that the demand for call options has exceeded that for put options by 35% over the past week. This suggests that there is currently no evidence in the Bitcoin futures and options markets to indicate an imminent price correction or deteriorating conditions. If anything, the data confirms that the brief dip below $60,000 on April 17 was not enough to foster a long-term bearish sentiment.
Please note that this article does not provide investment advice or recommendations. Readers should conduct their own research before making any investment decisions.