Bitcoin: How a surge on this front could be ‘dangerous’ for BTC

• Bitcoin perpetual swaps funding rates have rallied to multi-year highs on Binance and Bybit.
• The Crypto Fear & Greed Index showed that the market is in a state of extreme greed.

Bitcoin [BTC] borrowing costs on leading cryptocurrency exchanges like Binance and Bybit have reached their highest point since 2021, IntoTheBlock noted in a recent post on X (formerly Twitter). This indicates a surge in leveraged trading.

According to the on-chain data provider, on 14th March, BTC perpetual swaps funding rates on Binance and Bybit recorded highs of  0.06% and 0.09%, respectively. 

High Leverage equals high funding rates 

Perpetual swaps are a type of derivative contract that allows traders to speculate on the price of an asset without actually owning it.

The funding rate is a fee exchanged between traders to ensure that the price of the perpetual contract stays close to the spot price of the underlying asset. 

When an asset’s funding rates surge, as in this case with BTC, it suggests that there’s an unusually high demand for long positions compared to short positions. This indicates that more traders are betting on the price of BTC increasing than those betting on it decreasing. 

Although this commonly indicates the presence of significant bullish sentiment in the market, the volume of trades executed using high leverage also means that the market is overheating. 

High-leverage trading often reflects market sentiment. If traders are highly bullish and are using leverage to open long positions, this sentiment can drive up the funding rates. 

 How much are 1,10,100 BTCs worth today?

However, an unabated rally in BTC’s funding rates poses certain risks. As per the findings shared by a pseudonymous CryptoQuant analyst  in a report dated 6th March, the analyst emphasized the consequences of a surge in the funding rates of an asset.

“However, while rising funding rates typically accompany a bullish market sentiment, excessively high values can be dangerous. Elevated rates increase the risk of long liquidation cascades, which may result in heightened market volatility and unexpected corrective movements.”

Moreover, this surge in funding rates comes at a time when the market is overly “greedy.” As of this writing, the Crypto Fear & Greed Index is 81, indicating that the market remained in a state of extreme greed. 

A market driven by extreme greed is often at risk of sudden reversals, as sentiments can shift quickly. Negative news or a change in market dynamics could trigger a sell-off as investors rush to cut their losses, leading to a market correction.

At press time, BTC exchanged hands at $69,000, per CoinMarketCap’s data.