How Does a Negative Funding Rate Reflect Market Sentiment?
A negative funding rate reflects a predominantly bearish market sentiment, meaning the majority of traders are short on the perpetual contract. This high demand for short positions drives the perpetual contract price below the spot price, creating a negative premium.
The negative funding rate then forces short traders to pay long traders, creating a financial incentive for traders to take long positions and push the contract price back up toward the spot price.
Glossar
Funding Rate
Mechanism ⎊ Funding Rate represents a periodic payment exchanged between traders holding opposing positions in perpetual futures contracts, establishing an equilibrium between contract prices and the underlying spot market.
Negative Funding
Phenomenon ⎊ Negative funding is a market phenomenon specific to cryptocurrency perpetual futures contracts, occurring when the contract's price trades below the underlying spot index price, a condition known as backwardation.
Short Positions
Position ⎊ A short position in cryptocurrency derivatives, encompassing options and futures contracts, represents an expectation of a price decline.
Long Positions
Exposure ⎊ Long positions, within cryptocurrency derivatives, represent a directional bet anticipating an increase in the underlying asset’s price, establishing a net long gamma exposure.
Negative Funding Rate
Mechanism ⎊ Negative funding rates in cryptocurrency perpetual contracts represent periodic payments from long positions to short positions, determined by the difference between the index price and the perpetual contract price.