Ecoinometrics - Perpetual futures funding rate

Can you predict Bitcoin moves by looking at the funding rate?

The concept of funding rate is unique to the perpetual futures that make up the bulk of derivatives trading in the crypto markets. At a high level they serve as a mechanism to balance the pressure between long and short positions. But is it in any way predictive of the price action of Bitcoin?

---

The Ecoinometrics newsletter helps you understand Bitcoin and digital assets through the macro quantitative lens. Subscribe to get an edge on the future of finance.

Done? Thanks! That’s great! Now let’s dive in.

---

Perpetual futures funding rate

If you are not familiar with the Bitcoin derivatives market, a lot of the crypto derivatives business revolves around the use of perpetual future contracts. That is future contracts which never expire.

On one side those kinds of contracts simplify the decision making process of the traders. You don’t need to worry about expiration dates, rollover and so on. But on the other side futures contracts that do not expire can in theory move away from the underlying spot market indefinitely. That’s not what you want for a derivative product.

You don’t have this problem for traditional future contracts. The settlement of the contracts at the time of expiration serves as a forcing mechanism to keep spot and future prices from diverging. At the time of the settlement you need to deliver / take delivery of the underlying spot BTC so those special dates every month serve as a tether for the price where spot and futures converge.