Negative funding rates indicate dominance of bearish positions in the perpetual futures market.
PEPE, the self-proclaimed “most memeable memecoin,” has skyrocketed to more than $500 million in market capitalization in just over two weeks since launch.
Still, funding rates in perpetual futures tied to the token remain negative, indicating the dominance of bearish positions in the derivatives market.
A perpetual futures contract is an agreement with no expiration date to buy or sell the underlying asset at a predetermined price. Exchanges offering perpetual futures charge funding rates – or costs – of holding long (bullish) and short (bearish) positions to keep prices tethered with the spot market.
A negative funding rate indicates that shorts are dominant and are willing to pay longs to keep their bearish bets open. In other words, most traders expect prices to drop. A positive funding rate suggests the opposite.
Negative rates can stem from outright bearish speculation. Or they can indicate hedging activity – traders and early investors shorting perpetual futures to protect their long positions in the spot market against a potential price slide.
Hedging may be primarily responsible for PEPE’s funding rates, which have been negative from day 1, because small-cap meme tokens tend to be more volatile than market leaders bitcoin and ether, and can fluctuate greatly in a short amount of time.
While the funding rates reflect the bearish market sentiment, they also indicate scope for a short squeeze – a rally triggered by a mass unwinding of bearish short positions. The wealth of sellers in the market means prices need to move down, or the funding cost will become too burdensome for the bears.
According to data tracking platform Laevitas, PEPE’s recent rally may have been partly driven by the short squeeze.
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