Altcoin funding rates hit 9-month high — Bullish for altseason or a red flag?

As a seasoned analyst with over a decade of experience in the cryptocurrency market, I have seen my fair share of bull runs and bear markets. The current surge in select altcoins has left me both intrigued and cautious.

As a researcher delving into the cryptocurrency market, I’ve noticed an intriguing trend over the past 30 days. A specific set of altcoins, including Hedera (HBAR), Stellar (XLM), XRP, Algorand (ALGO), and Cardano (ADA), have experienced extraordinary growth exceeding 250%. This sudden spike has sparked curiosity among traders, leading them to ponder about the longevity of this rally and seek signs that might hint at a possible correction.

As a crypto investor, I’ve noticed some tokens seeming undervalued compared to their past peak prices, suggesting potential for more growth. Yet, it’s unclear if this current surge in value is based on solid fundamentals or not. What worries me is the prevalent use of leverage among buyers, which could lead to sudden drops in price.

As an analyst, I’ve observed a substantial increase in the 30-day funding rate for perpetual futures, with bulls paying anywhere from 4% to 6% every month to sustain their leveraged positions, based on data from CoinGlass. While these fees might seem insignificant during robust market upswings, they can swiftly chip away at a trader’s profit margin if prices remain flat or experience a downturn. Even experienced crypto traders may be able to endure 5% monthly funding charges, but there are definite financial limits to such costs.

Leverage levels are not high compared to historical peaks

In simpler terms, during the altcoin surge in February, some tokens reached funding rates that were very high over a 30-day period, up to 25%. These exceptionally high levels usually don’t last long because arbitrage desks take advantage of the situation by opening short positions on perpetual contracts and simultaneously buying the original asset. This allows them to earn funding fees without having to face market risk.

According to CoinGlass, the current funding rates for ADA and XRP are higher than they’ve been in the last six months, but they haven’t yet reached their highest levels from the past year. This historical pattern might mean there’s more potential for these altcoins to experience growth due to increased leverage. Nevertheless, it’s important to note that funding rates by themselves can’t guarantee that the ongoing bull market will persist.

On January 11th, something quite similar transpired. This was after there had been an 80% increase in altcoin market capitalization over a three-month period. During this time, the funding rate for most altcoins rose to around 8% for a 30-day period. But, this upward trend ended following a 15% price correction spanning from January 8th to January 25th. This seems to imply that an increase in the funding rate is more likely a result, rather than a trigger, of bull markets.

In the ongoing altcoin market, there’s a significant divide in performance and risk levels between altcoins and established cryptocurrencies like Bitcoin (BTC) and Ether (ETH). Compared to them, the funding rates for Bitcoin and Ether are quite low at 2.5%, reflecting a more conservative stance despite their impressive monthly price increases of 39% and 49% respectively.

The difference between Bitcoin (BTC) and Ethereum (ETH) investments versus altcoins is influenced by several aspects. On one hand, investors can amplify their positions in BTC and ETH through various derivatives like monthly futures contracts, options, or exchange-traded funds (ETFs). Conversely, factors such as the surge of meme coins have contributed to the altcoin craze. This trend has witnessed newly introduced tokens reaching unprecedented peaks.

In a surprising turn of events, digital tokens such as Goatseus Maximus (GOAT), NEIRO, and Cat in a Dog’s World (MEW) momentarily exceeded a market value of one billion U.S. dollars. This speculative frenzy seems to have increased the perceived worth of altcoin projects that are actively developed and enjoy strong support from their communities. However, it remains to be seen whether these high valuations were warranted or simply a temporary phenomenon, as only time can tell.

Regardless of the rise in funding costs, a rapid chain reaction of selloffs (cascading liquidations) in most alternative cryptocurrencies isn’t imminent. The current 30-day funding rates ranging from 4% to 6% are still within reasonable limits. However, given the high levels of leverage, it’s essential to exercise caution as market volatility endures.

This piece is meant to provide a broad understanding; it’s not to be construed as legal or financial guidance. The perspectives shared are solely those of the writer and may not align with the views of CryptoMoon.

2024-12-04 23:13

Leverage levels are not high compared to historical peaks

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