Funding rates across the crypto derivatives market plummeted to their lowest levels since the depths of the 2022 bear market as short selling increased over the weekend.
The dramatic drop in funding rates was reported by on-chain analytics provider Glassnode on Sunday.
“This is one of the most severe leverage resets in the history of cryptocurrencies,” the analysts noted, calling it a clear sign of “how aggressively speculative excess has been removed from the system.”
Funding rates are periodic payments between traders in perpetual futures contracts, the most popular cryptocurrency derivative. It is designed to lock the perpetual contract price to the spot price.
When funding rates are extremely low or negative, there are more short positions than long positions, which often indicates that derivatives speculators are expecting prices to fall, so people are willing to pay to hold short positions.
Too many shorts can cause the price to rise
However, extremely low funding rates, such as the current situation, can actually be bullish. This is because if prices start to rise, too many short sellers can cause the market to become oversold, creating the possibility of a “short squeeze.”
The virtual currency market is already recovering
This appears to be the current situation as CoinGlass’ long/short ratio has become bullish. About 54% of sentiment is bullish or very bullish, while 16% remains neutral and 29% remains bearish.
CoinGlass also reports that long accounts currently account for 60%, while 40% are still short.
However, according to Coinglass, the funding interest rate for the entire Bitcoin (BTC) and Ether (ETH) perpetual swap remains slightly negative at the moment.
Related: Cryptocurrency market cap recovers to $4 trillion, led by ETH, BNB, and DOGE
The spot market has rebounded strongly, with BTC up more than 5% after dropping below $110,000 on Sunday, and Ether rebounding 12% after falling below $3,800.
Largest liquidation in virtual currency history
The largest leveraged flash in crypto history, which some have dubbed “Crypto Black Friday,” saw roughly $1 trillion in market capitalization fall by 25% in a matter of hours, according to TradingView.
On Friday, after US President Donald Trump announced the latest round of tariffs on China, whales piled up short positions in anticipation of a decline. When this cascade occurred, 1.6 million traders with leveraged long positions were liquidated.
Volume was so strong that Bitcoin hit its first-ever $20,000 red candle, dropping its market capitalization by $380 billion “before shorts were closed and the V-bottom hit,” Covisi Letter reported on Sunday.
Not only is this the largest liquidation in history, but it is also nine times larger than the previous record. Leverage flashes often occur in the market and help reset the market following excessive speculative accumulation of crypto derivatives.
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