Ethereum’s perpetual futures funding rate has increased to levels not seen since the global liquidation event in August, when major cryptocurrencies such as Bitcoin and Ethereum fell along with their stocks, losing more than 20% of their value. Derivatives trader Gordon Grant warned that the cryptocurrency perpetual futures market remains vulnerable to selling from overly leveraged positions, potentially fueled by a combination of technical and macroeconomic factors.
According to Coinglass data, the OI-weighted funding rate is 0.0116%, the highest since July 29, when Ethereum was trading at $3,316 just before the 22% price crash in early August. The collapse was triggered by a plunge in global stock markets as yen carry trades were liquidated due to an unexpected interest rate hike by the Bank of Japan. Although the initial shock was exogenous in nature, Grant explained that the highly leveraged cryptocurrency linear derivatives futures market may have magnified the impact.
In an interview with The Block, Grant said the changing landscape of perpetual futures market participants indicates vulnerability to the cryptocurrency market in case another exogenous shock occurs, similar to a macro event such as the yen carry trade clearing that triggered an early liquidation event. August.
Other factors are also influencing the market, he said. For example, investors are wary of a potential downturn in Nvidia and other high-performance chip stocks, a slowdown in China’s recent impressive stock rally, and growing tensions in the Middle East.
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Futures funding rates have surged to positive highs not seen since just before the flash crash in early August. Image: Coin Glass
He suggests that these factors, combined with the existing leverage in the cryptocurrency markets, could precipitate or exacerbate a sharp market downturn, even if brief, especially in the context of options-driven liquidation.
“This is a reason to be more cautious when the worm strikes broader risk assets such as chip stocks, or when geopolitical shocks threaten to shake up our cage of stock market beta proxies, including cryptocurrencies where selling gamma pockets may exist. It’s an American election event,” Grant added.
Grant also laid out a specific risk: the possibility that large, long-term funds could be caught as culprits, pumping the funds to abnormally high levels and causing them to plummet in a final liquidation, such as the one that occurred on August 17, 2023.
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“Market positions such as large Ether overwriters who chose to sell August 2023 call options and hedge with long futures contributed to significant market volatility at the time the final liquidation occurred,” Grant added.
Ethereum’s on-chain activity has grown, especially as new decentralized finance protocols like Ethena attract users. Ethena’s strategy is to farm stablecoins to generate delta-neutral returns. In other words, you are purchasing ether while hedging your risk using perpetual futures. However, this type of strategy increases your exposure to fund rates, and negative rates can lead to significant losses.
“In a persistently negative funding environment, we have larger positions than we had before doing the shorts, which could essentially spin out of control,” Grant added.
With billions of dollars in short futures positions against long-term and staked spot holdings, a sudden drop in funding rates can result in tens of millions of dollars in losses within a matter of hours.
“This could force position closures and further accelerate the move to negative basis conditions,” he added.
Grant also pointed out the role of DeFi lending protocols in these market dynamics. While it offers some solutions, the lack of large blocks of coins to borrow against long futures positions, which has long existed in CeFi lending, means that market unwinding can be more prolonged and painful than in traditional finance.
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