Crowded trade? retail hasn’t been this long on BTC, ETH, SOL, XRP in over a year

Trading professionals have been more careful, while retail cryptocurrency traders are looking to capitalize on the possible approval of a spot Bitcoin ETF. Despite recent problems in clearing the $1.7 trillion market cap obstacle, the market capitalization of the cryptocurrency market has been trading in a very narrow upward trend for the previous ten weeks, suggesting that positive momentum has continued.

In December, the ascent of Ether to $2,280 encountered a halt at $2,400, while Bitcoin reached a 20-month peak of $41,664, surpassing $44,000. Analysts are still debating whether the pronounced demand for leveraged long positions could lead to cascade liquidations.

Traders face a potential risk of liquidations, particularly if they heavily depend on futures markets, despite the current upward trend fueled by the anticipation of a spot Bitcoin ETF approval by March. Analysts keep an eye on leverage demand to assess the likelihood of a derivatives-driven sell-off. Let’s now examine the methodology used for this assessment.

Pro traders are (moderately) bullish on Bitcoin

The Bitcoin futures premium, sometimes referred to as the base rate, should examine to ascertain the positioning of whales and market makers. Because monthly contracts do not have a funding rate, which makes them trade 5%–10% higher than regular spot markets and justifies the longer settlement period, professional traders favor these contracts.

However, considering Bitcoin’s price surged by 11.5% in December alone, we reasonably anticipate the existing 15% premium. because the futures contract is presently trading $1,800 above the spot price, investors ready to speculate on a price decrease currently possess a substantial cushion.

The futures premium for the displayed three-month contract will undoubtedly disappear on the expiration date (March 30). In response, the enticement leads arbitrage desks and market makers to short (sell) futures contracts and hedge the position by purchasing spot Bitcoin. This deal, known as “cash and carry,” is similar to the structure of a fixed-income market.

BTC, ETH, SOL, XRP funding rates at yearly highs

 The perpetual contract, often known as an inverse swap, is the ideal leverage mechanism for retail traders. Charge an adjustable rate every eight hours for these contracts. As a result, instead of the customary premium observed in monthly contracts, their pricing tends to mimic the spot markets.

In some ways, it is more straightforward for traders, but it also includes the worry of unpredictable funding costs. 

When the funding rate is positive, it means that purchasers with long holdings are demanding more leverage; conversely, when sellers with short positions need more leverage, the funding rate is negative.

Considering the open interest of futures, take note of how the weekly funding rate, which ranges from 1% to 1.2% for the top five coins including XRP and Solana’s reached a one-year high.

Is the crypto market overheated?

 Until there is an unanticipated drop in the asset price or a period of price stabilization, excessive optimism may cause such indicators to stay above 2% for a few weeks or even longer.

On the other hand, in bear markets, the financing rate may stay negative as long as there is a greater demand for short positions than there is for long positions to use leverage.

Even though the average weekly funding rate of 1.2% at the moment may seem high, most retail traders are just interested in making short-term gains perhaps a few weeks before the spot Bitcoin ETF decision. Consequently, assuming they are even aware of the expense, the majority of them can bear it.

During bull runs, the conditions are ideal for high fees due to investors’ greed and incompetence in estimating financing rate costs. This explains, at least temporarily, why there is no actual ceiling on the amount of spending that can considered excessive.

Based on the three-month futures premium, bitcoin futures are not experiencing any unusual events. Put otherwise, there is no imminent threat of a mass liquidation brought on by retail traders employing perpetual contracts with enormous leverage.