Funding rates in bitcoin (BTC) perpetual futures listed worldwide crashed late Thursday after a sudden price slide put the recently popular short volatility bets at risk.
Perpetual futures are a type of derivative that tracks the price of an underlying asset, such as BTC but does not have an expiration date. This makes them a popular choice for traders who want to speculate on the price of an asset without having to worry about time decay.
The funding rate is a mechanism that helps to keep the price of perpetual futures in line with the price of the underlying asset. When the price of the perpetual futures is higher than the price of the underlying asset, long traders (those who are betting on the price to go up) pay short traders (those who are betting on the price to go down) a funding fee. This helps to incentivize short traders to close their positions and prevents the price of the perpetual futures from becoming too overvalued.
On Thursday, the price of BTC fell sharply, from around $28,000 to $25,000. This caused the funding rate on perpetual futures to become negative, meaning that short traders were paying long traders a funding fee.
This was a major reversal from the previous trend, in which short volatility bets had been popular. Traders who had shorted options in recent weeks were betting that the price of BTC would remain relatively stable. However, the sudden price drop caught them off guard and forced them to sell their perpetual futures positions to hedge their losses.
This selling pressure further exacerbated the price decline, causing the funding rate to become even more negative. At one point, the funding rate on Deribit’s BTC perpetual futures reached -10%, which is a very rare occurrence.
The sharp drop in funding rates is a sign that the short volatility bets that were popular in recent weeks are now unraveling. This could lead to further volatility in the BTC market, as traders scramble to close their positions.