Negative funding
Why would traders holding short positions pay the traders holding long ones, and what does that payment reveal about the market?
In plain words
Negative funding means the regular payment in a perpetual futures market runs from shorts to longs. It happens when the futures price sits below the spot price, and it compensates long holders while raising the cost of betting on further falls.
Why it matters
A run of negative funding shows that sellers are willing to pay to stay short, which can signal a crowded bearish position and a market that is leaning hard in one direction. It also makes shorting more expensive and holding longs more rewarding, which can amplify a reversal if the crowd turns out to be wrong.
In a real week: ETH, week of 12 September 2022
In the week of 12 September 2022, ETH fell 24.44%, closing 72.47% below its 52-week high. Across that week the eight-hour funding rate averaged -0.056%, dipping as low as -0.3019% and rising to just 0.01%. Shorts were paying longs to hold their positions while ETH dropped from an open of 1766.12 to a close of 1334.51.
A common mistake
Reading negative funding as a simple buy signal. It shows that shorts are paying to stay in the market, which can precede a squeeze but also simply persist while prices keep falling.