Bitcoin perp funding is negative. Arthur Hayes wants answers
BitMEX co-founder Arthur Hayes noticed negative perp funding on several well-known exchanges such as Gate, Binance and his own BitMEX. He attributed the negative funding rate to a wealthy “cohort” that has sold heavily into digital asset markets.
Perp is short for “perpetual rolling swap”, a popular crypto derivative. Unlike a true swap, perps have no expiration and use a funding mechanism to anchor contracts to underlying spot prices.
BitMEX was once the world’s largest perp exchange, famously offering up to 100X leverage to perps. In fact, BitMEX claims to have invented perp. Coincidentally, co-founder Hayes also co-owned a second, secret, for-profit entity that prevailed as the winning party against its clients’ perp liquidations.
Years later, Hayes pleaded guilty to unrelated criminal charges of violating the Bank Secrecy Act.
Today, BitMEX has a new CEO. Nevertheless, the exchange still offers advanced trading products for digital assets, including its signature perpetual swap contract.
What can explain negative perp funding?
Negative perp funding rates are rare but not unprecedented. Funding for bitcoin perpetual swaps previously had a negative streak that started on May 18, 2021, and lasted over a month.
A simple explanation for negative perp funding is caution in holding assets with centralized custodians. Many large managers such as FTX have gone belly up. Funding perps require holding funds on risky, opaque exchanges.
Perpetual funding can go negative when short positions need additional leverage, also known as margin. This negative perpetual funding may indicate a lack of demand for long positions, indicating that futures traders are not confident that the price of the underlying asset will rise.
Similarly, Hayes called it strange that perpetual funding would be negative, with prices ranging from -0.0002% on OKX to -0.0817% on CoinEx. These percentages may seem insignificant until you consider that perpetual financing rates are usually measured in hundredths of one percent.
Read more: BitMEX has now lost all US profits after founders pleaded guilty, lawyer says
Concluding notes
Perps mimic spot trading while providing higher leverage with a funding rate, usually an eight-hour rate. Bitmex’s perpetual swap contract can typically stay close to spot prices in that the funding rate favors traders who do not force the perpetual swap contract’s market price to deviate significantly from the spot price.
For example, CoinFLEX enters into its perpetual exchange contract capable of delivery. Periodic settlement resolves imbalances by enforcing a repurchase agreement or “buying back” long or short positions to sell in a Dutch auction.
Finally, it is worth considering that most crypto prices have risen abnormally this year. The combined market capitalization of all CoinMarketCap listings has risen 58% year-to-date. As a result, institutional traders may have difficulty maintaining their bitcoin hedges amid this increased volatility. Alternatively, perhaps a group of traders is putting selling pressure on bitcoin so they can “buy the dip” before the next bull run. Or maybe it’s currency risk, margin rates or some other explanation altogether.
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