The Merge update is about to arrive to make Ethereum’s transition to Proof-of-Stake complete. But the latest figures tell us that not all the investors are onboard. They are willing to bet against it, with more of such investors taking a short position on Ethereum. It has resulted in Ethereum Futures seeing funding rates go negative,
Why do Funding Rates go Negative?
Funding rates are payments that investors make periodically in a bid to make the price of the perpetual futures contract close to the index price. These rates have not become negative because the short traders are paying premiums to long traders to keep their position open. It is perhaps the main reason behind Ethereum’s all-time high “open position” of 4.21 million.
Negative fundings mean that most are betting the Ethereum price will power after the merge upgrade.
Crypto Traders – Negative Funding Rates are Buy Signals
Many crypto traders on Twitter have said that the negative funding rates are buy-signals. By their rationale, it is the ripe time to buy before Ethereum’s transition to Proof-of-Stake is complete.
In this spot-driven & up-only market, a low funding rate could be a buy signal.
It seems not a good idea to wait for a correction when institutions buying $BTC.
— Ki Young Ju (@ki_young_ju) January 3, 2021
However, does the data matches their point of view?
An analyst has said that negative funding rates aren’t particularly big signals, but the price action gets more interesting whenever the funding rate hits such a low level.
The same analyst said the last time the funding rates were this negative was July last year, right before Bitcoin’s and Ethereum’s short squeeze.
However, the analysis, like in the Tweet, is purely based on the Bitcoin bull run last year, when Bitcoin went from $11k to $34,000.
The Negative Funding Rates Have Increased Ethereum Futures Liquidations
ETH’s perpetual future contracts have gained upwards of $140 million in liquidation as the negative funding has turned many investors bearish about Ethereum’s short-term growth after the Merge update.
Liquidation is when an exchange forces the investors with the leveraged position to close to use those funds to keep the trade open.
According to veteran investors, these funding rates, standing at -0.024%, are pushing Ethereum’s price action towards a more volatile direction.
However, don’t confuse the negative funding rate, as the market is entirely bad. Many long investors are likely shorting some of their positions towards crypto to hedge their bets.
Crypto YouTubers, like Brian Jung, however, believe that the negative funding rates, combined with the all-time-high open position rate, means one thing:
“Many new moneys entering in the ETH ecosystem is short-bias.” – he says in his video.
It means that most entering the ETH futures market are betting not for but against the Merge. That said, there are two reasons why this might be.
- Unsuccessful transition: Ethereum has a history of unsuccessful upgrades. And every time it has happened, the price action has slumped. Many might be wondering if the same could happen this time.
- Hedging their bets: Those who have taken long positions against the Merge are trying to reduce the risk by betting equally on short positions. They are playing on both sides of the field, so their funds don’t suffer as much.
Ethereum Proof of Work Hard Fork – Rumours
Another reason that the market might be behaving this way is the rumor of an Ethereum hard fork. There are speculations that ETH devs aren’t fully committed to only going to the proof-of-stake consensus and are planning on creating a PoW hard-fork so that the miners can go about their business as usual.
This rumor is getting a push because Ethereum’s PoW mining is a billion-dollar industry – creating millions of dollars of profit for the miners. So, saying that these miners would accept their fate after the transition might be unwise.
Many analysts have said that this hard fork isn’t practical, citing that Bitcoin and Ethereum have vastly different ecosystems. So, for now, it is just wishful thinking.
Keep Waiting for the Merge
While many have been bullishly pursuing the hard forks, major centralized exchanges like Binance, Coinbase, and circle have clearly stated that they won’t be supporting any ETH PoW hard forks. So, it is likely that if the hard-fork rumors do turn out to be true, you won’t be able to sell in CEXs that matter.
So, for now. Please keep waiting for the Merge upgrade and stay tuned with Insidebitcoins as we keep giving you fresh updates about the major going-ons of the crypto market.
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