A select group of altcoins, including Hedera (HBAR), Stellar (XLM), XRP, Algorand (ALGO), and Cardano (ADA), have seen impressive gains of over 250% in the past 30 days. This sharp rise has traders questioning the sustainability of the rally and looking for indicators of a potential correction.
Some investors argue that the token is trading at a significant discount to its previous highs, leaving room for further upside. However, regardless of whether the recent rally is fundamentally justified, buyers’ excessive use of leverage increases the risk of a sharp price correction.
30-day funding rate for perpetual futures. Source: Coinglass
Data from CoinGlass shows that 30-day funding rates for perpetual futures have risen significantly, with bulls paying between 4% and 6% per month to maintain leveraged positions. These costs may seem manageable during strong uptrends, but if prices are stagnant or falling, they can quickly erode a trader’s margins. Seasoned cryptocurrency traders may tolerate a 5% monthly funding fee, but there are practical limits to such costs.
Leverage levels are not as high as they were at historical highs.
For context, during the February altcoin rally, some tokens reached 30-day funding rates of up to 25%. These extreme levels are usually short-lived as the arbitrage desk initiates short positions on perpetual contracts while purchasing the underlying assets to secure funding fees without exposure to market risk.
Cardano (ADA) and XRP 30-day funding rates. Source: Coinglass
Data from CoinGlass shows that current funding rates for ADA and XRP are noteworthy compared to the past six months, but remain below their 12-month highs. Historically, this suggests that altcoins still have room for further leverage-driven growth. However, funding ratios alone are not enough to ensure continuation of the current uptrend.
A similar scenario unfolded on January 11 after the altcoin market cap surged 80% in three months. At the time, the 30-day funding rate for most altcoins had risen to 8%. However, the rally stalled after a 15% price correction in the two weeks to January 25. This suggests that increased funding rates tend to be a consequence rather than the cause of bull markets.
What is striking about the current altcoin season is the stark contrast in performance and leverage between altcoins and major cryptocurrencies. The 30-day funding rate for Bitcoin (BTC) and Ether (ETH) is only 2.5%. These are relatively conservative figures considering the significant monthly price increases of 39% and 49% respectively.
This discrepancy is partly due to the fact that investors can leverage their BTC and ETH positions through alternative instruments such as monthly futures, options, or exchange-traded funds (ETFs). However, other factors have fueled the altcoin craze, such as the memecoin boom, which has seen newly launched tokens hit record highs.
Tokens such as Goatseus Maximus (GOAT), NEIRO, and Cat in a Dog’s World (MEW) briefly surpassed $1 billion in market capitalization. This speculative craze has increased the perceived value of altcoin projects through active development and strong community support. This assessment may have been overly optimistic, but only time will tell whether it is justified or a passing phase.
Despite the surge in funding rates, there is no immediate threat of cascading liquidations across most altcoins. Currently, the 30-day funding rate remains at a manageable level of 4-6%, but as volatility continues, leverage increases and caution is required.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.