Market Meditations | May 24, 2021
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One hardly needs to rely on technical or fundamental analysis when the market is parabolic bullish. Simply buy, wait and accumulate profit. Of course, when market conditions are less bullish, it’s not quite so easy. Those who accumulate profit are those who are able to apply technical and fundamental knowledge to the current market conditions.
? Our mission at Market Meditations is to provide education and help everyone build wealth. In every market condition. We achieve that today through a comprehensive market update and a Funding Rates Guide.
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Welcome to Part 1 of our 2 Part Fundamental Analysis Guide.
Part 1 will focus on Funding Rates.
GOAL: Have a foundational understanding of Funding Rates such that you can use a wider range of On-Chain Analytics tools
EFFORT: 30 mins to read through carefully
REWARD: A useful tool to assess the state of the market
Part 2 on Wednesday will teach the Stock to Flow Model. What Forbes describes to be “a remarkably accurate price prediction model”.
? To receive Part 2 and more crypto analysis and insights, make sure you’re part of the free Market Meditations community ?
What Are Funding Rates?
QUICK ANSWER. Funding rates are periodic payments to long or short traders based on the difference between perpetual contract markets and spot prices.
IN ENGLISH. To understand the statement above, you need a basic understanding of traditional futures contracts.
? A traditional futures contract is an agreement to buy or sell a commodity, currency, or another instrument at a predetermined price at a specified time in the future.
In traditional futures contracts, settlements occur on a monthly or quarterly basis – depending on the contract specifications. At settlement, the contract price converges with the spot price, and all open positions expire.
FACT CHECK. If you’d like a further understanding of futures contracts check out our Cryptocurrency Options Guide.
? Perpetual contracts (as the name suggests) never settle in the traditional sense. However, exchanges still need a mechanism to ensure that futures prices and index prices converge on a regular basis. This mechanism is known as the Funding Rate.
What Does a Positive or Negative Funding Rate Mean?
Funding rates are periodic payments to long or short traders based on the difference between perpetual contract markets and spot prices. Therefore, depending on open positions, traders will either pay or receive funding.
REMEMBER. Funding rates prevent lasting divergence in the price of both markets.
The funding rate is a small fee paid by one side of the contract to the other.
? When the funding rate is positive, the price of the perpetual contract is higher than the market price, thus, traders who are long pay funding to short traders.
? When the funding rate is negative, the price of the perpetual contract is below the market price, which means that shorts positions pay for longs.
How to Use Funding Rates?
LEVERAGE IMPLICATIONS. As funding calculations consider the amount of leverage used, funding rates may have a big impact on one’s profit and losses. With high leverage, a trader that pays for funding may suffer losses and get liquidated even in low volatility markets.
MARKET SENTIMENT. Funding rates represent traders’ sentiment of which position they bet on in the perpetual swaps market. Funding rates tend to correlate with market sentiment:
Positive funding rates imply traders are bullish and long traders pay funding to short traders.
Whereas negative funding rates imply many trades are bearish and short traders pay funding to long traders.
“When pricing is trending up (buyers in control) and the funding rate remains positive, then there are more buyers than sellers (in the simplest terms). If sellers/shorts attempt to hit the bids heavily and push the price down, in a uptrending market the drop in funding rate, if it stays positive, is just another buying opportunity for bulls, and thus the price continues to rise” – The CryptDex Report
Funding rates can be used as confluence with your technical analysis and indicators to help create a trading strategy:
Since shorts pay longs when funding rate is negative, if price action and your set of indicators suggest a good potential long setup, you may consider entering, since those who are short are essentially paying you to be long.
On the contrary, because longs pay shorts when funding rate is positive, entering a long position when funding is high means you will be subject to paying anybody who is short.
This is money out of your pocket. Thus, you may consider taking profit quickly to reduce the amount of funding you pay.
As you can see, you can use funding rates as simply another data point to take on high probability setups.
REAL TIME. To access real time funding rates, you can use crypto exchanges such as FTX. Remember you can use our referral link for a 10% discount. Based in the U.S? Here’s a discount link for you: FTX.US.
Either type ‘funding rates’ and hit enter on the search bar or use the Futures tab to navigate to a specific contract. The full list will look something like this:
Source: FTX (taken at 15:20 BST)
Note the BTC contract in the above screenshot is positive. Reflective of the current relief rally and somewhat more positive / bullish temporary sentiment.
HISTORIC. On-Chain Analytics data providers use historical funding rates to convey changes in market sentiment over time. Notice in the chart below that for the first time this year, funding rates turned negative in the recent dip.
Source: The Block
In terms of free services, The Block provides some basic analytics here and the CEO of Cryptoquant runs a Twitter account that regularly shares On-Chain Analytics, sometimes including Funding Rates: @ki_young_ju
FACT CHECK. For a high level overview of various On-Chain tools, check out our On-Chain Analytics guide.
Thus concludes Part 1 of our Fundamental Analysis Guide.
We look forward to writing to you again for Part 2 on Stock to Flow Models. What Forbes describes to be “a remarkably accurate price prediction model”.
? If you’re serious about building wealth through crypto and want to receive Part 2, be sure to join 24,000+ others in the Market Meditations community ?
Temporary Relief Rally or Bull Run Continuation?
The crypto market is going through a relief rally on Monday as bargain hunting is helping major coins regain some ground following last week’s sell off. Market mood was sour off the back of Tesla suspending vehicle purchases with bitcoin (citing high fossil fuel use by miners) and China reiterating its ban on cryptocurrency mining.
“Crypto funds, macro funds, opportunistic venture capitalists are beginning to buy this dip in BTC, ETH as well as blue-chip DeFi by staggering limit orders and running longer time-weighted average prices” – Coindesk
As referenced in the quote above, in particular, coins associated with decentralised finance (DeFi) such as LINK, ETH and UNI are trading considerably higher on the 24 hour chart. With reports circulating from the likes of PwC regarding the potential of DeFi.
Has the bull market resumed? Is this a trap? Will we see a dead cat bounce?
? When there is FUD in the tweets and blood on the streets, we prefer to watch trend-lines rather than headlines.
As the market leader, it makes sense to keep an eye on BTC.
Let’s regard the importance of these headlines to the extent that they disrupt overall market structure.
Nothing has actually changed with regards to key BTC technicals.
We remain range bound with the mind to buy at the lower range ($30k) and sell at the higher range ($45k).
No news thus far has managed to disrupt these levels.
For more technical analysis, check out today’s YouTube video where Koroush AK goes through some of his topic Altcoin picks.
On Mondays, our ‘Scan The Week’ section is designed to show our community what events and headlines we will be keeping an eye on.
Monday, 24th May
Solana Coinbase Pro Launch
Inbound transfers for SOL are now available in the regions where trading is supported. Traders cannot place orders and no orders will be filled. Trading will begin on or after 9AM PT on Monday May 24 if liquidity conditions are met
Tuesday, 25th May
MM Podcast Release #73 Portfolio Allocation and Black Swan Events with Nassim Taleb ?
In this episode, we explore key takeaways from 2 books, in Nassim Taleb’s Incerto series.
Wednesday, 26th May
NFT Graphic Novel
The Terra Virtua collectibles marketplace has announced the launch of a NFT-only graphic novel from award-winning British artist Nick Percival.
Thursday, 27th May
Consensus is a three day conference that unites professionals across the globe for an immersive virtual experience aimed at exploring the evolution of cryptocurrency and blockchain technology.
Some of the links we’ve included are affiliate, they give you rewards and discounts and earn us a commission. Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision.