Overheated rally? 3 warning signs emerge for Bitcoin as funding rate soars

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Bitcoin (BTC) continues to climb to new heights above $ 35,000 on Jan. 6 as US buyers continue to raise the price on Coinbase. In addition to the open interest in futures, the refinancing rate of the BTC futures market is also increasing.

The combination of a high financing rate, the sale of whales in Asia and an open interest in a record high futures market increases the chances of a short-term correction.

BTC / USDT daily candle chart (Binance). Source: TradingView.com

Which is more likely a correction or a continuation of the Bitcoin rally?

Currently, as noted by Mechanism Capital’s Andrew Kang, the Bitcoin futures market’s aggregate open interest is at a new record high. He said:

“The aggregate open interest for BTC futures / swaps has risen to $ 11 billion. Traders are currently paying annualized interest of> $ 5 billion for the privilege of craving corn.”

The problem is that the market is overfunded and mostly craves bitcoin. The term longing means buying BTC with leverage in the derivatives market.

The refinancing rate of Bitcoin on the futures market exceeded 0.15%. On average, the BTC funding rate is around 0.01%, which is around 15 times the normal rate.

Funding is a mechanism that futures exchanges use to find equilibrium in the market. Long or short contract holders must pay each other a fee every eight hours. Longs pay shorts when the majority of the market is long and vice versa.

When the funding fee is over 0.15%, it means the market is extremely overheated and the vast majority of the market is craving for Bitcoin.

This trend increases the likelihood of a long squeeze, which will force long contract holders to adjust their positions when the price of Bitcoin goes down.

When the market’s open interest is at an all-time high, the chances of a larger long squeeze increase further.

Whales in the Asian market have also been selling large quantities of Bitcoin over the past week. Data from CryptoQuant shows massive inflows of BTC into Bithumb, South Korea’s largest exchange.

Still, many positive bullish factors remain, including hash rate. According to analysts at Intotheblock, the Bitcoin hash rate is rising towards new all-time highs. They said:

“Bitcoin continues to set new highs, breaking above $ 35,700 for the first time on January 5th. BTC is now up 74.9% since the previous ATH was broken on December 16. As the price continues to rise, the hash rate also rises, pushing for new records. “

Watch Coinbase’s outflows

In the short term, outflows from Coinbase are the most important metric to measure short-term sentiment around Bitcoin.

Coinbase Pro is draining. Source: CryptoQuant

Coinbase outflows often signal institutional buy orders as institutions and high net worth investors prefer to keep their assets away from centralized platforms. Ki Young Ju, the CEO of CryptoQuant, said:

“For your information, the January 2nd Coinbase outflow was an all-time high. It appears that institutions bought BTC when the price was over 30,000. The BTC bull market is not over yet. “

If Coinbase outflows and premiums stay high, the likelihood of a major correction should decrease anytime soon.