07 Dec 2021
Liquidation cascade sends funding rates down to negative territory
Funding rates plummeted deep into negative terrain following the Dec 4th crash but have since recovered into neutral territory.
Amid the December 4th crash, funding rates plunged deep into negative terrain as long positions got liquidated in the market, leading to a large price deviation between the perps and the spot market.During the crash, Deribit’s BTC price fell to $39,977, and the Binance perp reached a bottom of $40,988. Meanwhile, Coinbase reached a low of $42,333. FTX’s perp maintained a far closer peg to the spot market, reaching lows of $41,762. The prices of the perpetuals have since aligned with the prices in the spot market, leading funding rates to recover to neutral levels. Perpetuals are the most popular derivatives instrument in bitcoin and, as noted last week, saw an alarmingly high open interest in a historical context throughout November. Following the crash, the BTC denominated OI in the perps fell from 240,000 BTC to 190,000 BTC. The last time we experienced such a low BTC denominated OI in the perpetuals was back in late May and June, following several large liquidation events in April and May. As of now, the overall leverage in the market seems to be in a far healthier state, and the market seems more sustainable. However, pay attention to the flows in the perps; sentiment changes rapidly.