I woke up this morning to a few thousand messages in my Telegram inbox. A few thousand more than normal, to be sure.
Why? Ethereum had dropped 5% overnight from ~$4,000 to $3,800 on a big wick lower. Somewhat disconcerting but not the end of the world. I proceed to sit down at my computer and watch the market puke by an additional 20% (for most altcoins) in the proceeding 30 minutes.
I wasn’t too sure what happened at first. I’m far from a trader—more so a fundamentals investor and yield forager than anything.
But the answer was seemingly sitting right in front of me: a day earlier one of my peers in the space sent the image below to a chat I frequent. I had saved it on my computer for future reference.
To summarize this mess of numbers below: Funding rates (the fee that long positions pay short positions in a perpetual futures market to keep the derivative price in balance with the underlying index) was well into the positive. That’s to say, on a recurring basis, long position holders were paying rates annualizing often in excess of ~50% to keep their positions open.
Funding rates straying higher is often seen as a sign of a leveraged and euphoric market, as a ~50% annualized funding rate indicates there is a large swath of traders willing to pay that much to obtain leverage in hopes of profiting more from a move to the upside.
As Ethereum, Bitcoin, and other crypto assets continued to plunge, it became clear that this was at least in large part due to the leveraged positions of traders. Bybt, a data service, indicated that around $2 billion worth of liquidations had taken place in the hour of Ethereum’s move to $3,000. In total, just under $4 billion was liquidated in the past 24 hours as of the time of this article’s publishing.
So, is the market dead? Far from. This isn’t meant to be any financial advice but by all accounts, the fundamentals of this nascent space are still positive.
Due to a single NFT drop earlier today, more than $5 million worth of Ethereum was burned forever in ten minutes. Athletes and celebrities flock to NFTs as they capture mindshare and attention outside of this space. Some of the smartest investors in the space continue to buy top assets. And so on.
Onward and upward. Right?
Meet the Authors
Joseph Young is a cryptocurrency analyst who has been in the space since 2014. He contributes to Forbes, CoinTelegraph, and a host of other top crypto news sites. Over his 6+ years in the space, he has built countless connections with industry leaders and has amassed over 150,000 followers on Twitter.
Nick Chong is a passionate crypto researcher specializing in identifying and extracting conclusions from trends within the rapidly emerging DeFi space. He has been involved in the crypto markets since 2016, and sources deals for ParaFi Capital—a DeFi-focused hedge fund.
Cole Petersen first learned about Bitcoin in 2013 and began working in the space in 2017. While on a gap year as a student at the University of California, Irvine, he is now a managing partner at a crypto-asset venture fund and previously worked as an associate at BlockVenture Coalition.
Disclaimer: None of this newsletter should be construed as financial advice or a endorsement to use or invest in a specific crypto-asset or crypto-asset protocol. Team members may hold positions in assets mentioned.]