€ @CRYPTOCRED FUNDING & Ol @CRYPTOCRED TWITTER SPACES PREP NOTES [18/10/2024] Introduction ‘* Perpetual swaps trade a ton of volume and play a large part in Bitcoinlerypto price discovery «Derivatives data, specifcally funding rates on perps and Ol, are areat for providing short to medium-term context ‘© Which side is being aggressive © To what effectihow successful are they ‘© What isthe likely consequence ifthe agaressors are wrong ‘¢ Most of you degens trade futures so cant hurt to understand some very basic and accessible date Funding ‘© Perp price = price of the perpiswap/future ‘Index price = price of ‘Bitcoin” (dened bylcomprised of a basket of spot exchanges to sive an average or true price) ‘Longs closing = sell orders «© Shotts closing = buy orders ‘© Perpetual swap = non-expiring ure; designed to mimic a spot marketleasier instrument (no basis, expiry, rollover etc.) while also offering leverage ‘If there's no expiry (future doesn't converge to spot upon expiry) then how does this contract stay in line withthe price ofthe underlying? © Answer. funding ‘* Funding: amount paid by long holders to short holders / short holders to long holders © If funding is postive = fdure trading above index = pay to be longiget paid to be short © If funding is negative be long ‘* The greater the premium or discount (atference between price of future and price of index) the higher#dower the funding Iflongs are getting really aggressive and pushing perp much above inde: high funding = expensive to get longinice atb if you want to short = longs closing andlor arbs entering the market (buy spot, sell fature, collect funding) = brings future price more in ine with index price by pushing t down 1» Strong cash bid can also close the gap but generally less common when futures are jacked tothe tts If shorts are getting relly aggressive and pushing perp much belowindex = negative funding = expensive to get short/get paid to long = shorts cosing andior arbs entering the market (sell spot, buy fture, collect funding) = brings future price more in line wth index price by pushing it up ‘Liquidation cascade » Think of leverage as a loan © Put up X amount of collateral for a greater than X postion size © More margin = more collateral = lower leverage = further ffom liquidation © Less margin = less collateral = higher leverage = closer to liquidation » Liquidation occurs when margin available for a position falls below maintenance margin © Atthis point, more or less, the exchange assumes the postion on your behalf ‘and tries to get rd of t (some debate asto whether this is a market order or atop ‘of book limit order etc. but effectively, longs geting liquidated = sell orders hiting {future trading belowindex = pay to be shortiget paid to€ @CRYPTOCRED FUNDING & Ol close -+ becomes a buy order —+ pushes price up —» triggers another short iq —> forced to close - becomes a buy order —» pushes price up — repeat 1 The effect ofthis is exaggerated when Miers widen spreads/adversely select in this environment to avoid one-sided or toxic flow, so orders hitting a thin(ner) order book = bigger price moves (hence the wicks) ‘¢ Myth #1 - High funding is bearish because everyone is long © High funding can, especially in a strong uptrend, be the cost of doing business + if everyone wants to be long, it can't be cheap © Implied mental calc: Pr. from long offsets the cost paid to be long © High funding can be bearish if newlongs enter the market (Ol increase andlor (predicted) funding increases) but price moves sidewaysidown —» cost of being long eating into margin while Pri isnt moving (+ someone absorbing those fresh buyers) © High funding can be bearish if funding increases as the market is moving down + leverage is buying the dip —> can be the cause of a liquidation cascadelarger unwind ‘¢ Myth #2 - Negative funding is bulish because everyone is short © Sometimes, when the maret is bearish, people wanna hedge/short — this naturally pushes derivatives down and belowthe spot price © As discussed, futures have leverage —> funding gets negative after a nuke because the long liquidations exacerbate downside moves ie. cascades push price further than ‘normal’ far belowindex ‘= Usually just means a ton of people got liquidated and the perp got ‘nuked, not necessarily that ‘OMG XYZ shorted the bottom!” — naturally there's gonna be @ significant premium/discount which skews the funding, that’s a reflection or consequence of the liquidations, net fresh longs at the topishorts atthe bottom (as demonstrated by Ol, which typically gets tutbowiped on cascades) ‘¢ The clearest setups are contextual and often a product of price diverging from funding ‘aggression that is unrewarded » Price at support, funding negativelbaseline, funding becomes more negative as price rises OR funding becomes more negative as price isnt budging 1 Likely inference: derivatives fading the rally and paying forthe privilege, effectively paying to be offside / cash bid absorbing derivatives selling and pushing price higher » Price at resistance, funding high, funding becomes more postive as price falls OR funding becoming more postive as price isnt budging 1 Likely inference: derivatives bought the breakout (and doubling down on dips), effectively paying to be offside / cash market absorbing derivatives buying and pushing price lower © Generally: If funding is skewed strongly in one direction and price isnt moving inthe direction of agaressive positioning or i's going sideways, the aggressors arent being rewarded and are likely to bleed out J unwind © Dan from CMS: Context > Rate itself + “Howald it get there?” ‘* Funding trades © High funding = buy spot, sell future, collect funding (ret ifbackwardated + ‘some other idiosyncrasies) © Negative funding = sell spot, buy future, collect funding (ret ifprice keeps ‘nuking) + not delta neutral unless your baseline is spot long Checklist © Where isthe market contextually/structurally ‘= Support, resistance, trend, breakout attempt, breakdown attempt etc. © ls postioning expensive andor are there aggressors in the market 1s Iflongs are aggressive: 1) does it make sense contextually, 2)is the market moving in their favour/rewarding their aggression, 3) ifnot, are they doubling down while oftside? 1s Same logic (ust inverse) applicable to shorts€ @CRYPTOCRED FUNDING & Ol © Sellers getting aggressive in a contextually unattractive spot and going Unrewarded for ther efforts (+ adding leverage on rips + build of new! while market hasnt budged) = increased probability of a move higher ‘© Other nuances ‘© Werth monitoring alt funding as well as BTC funding, sometimes BTC can be flat but gambling in shitcoins -» sill gets fushed © Don't be a high funding bad /low funding good sheep —- use your brain and your understanding of howthese things are calculated to come to a probabilistic Understanding and assessment ofthe circumstances Funding can CHANGE pretty quickly keep an eye on predicted fundingiprice of perp relative to price of index © You don't always need a nuke or a fush or 2 reversal to normalise funding ‘= High funding can become normalised with perp longs clasing andlor @ ccash bid pushing index closer to perp (andlor spreads normalising after 2 liquidation cascade) andlor the aforementioned arb simply works ‘= Negative funding can become normalised with perp shorts closing (endior spreads normalising after a liquidation cascade) andlor the aforementioned arb simply works 1s1.2..No need to be dramaticinct always a massive squeeze incoming, especially ifthere wasnt a corresponding uptick in Olin the frst place © Token-margined vs Cash-margined ‘= Watch both, token-margined becomes more important as BTC goes upftrends but it's abit of a degen contract be convexity works against longs ‘= Use Coinalyze to monitor aggregated Os et. Open Interest ‘¢ Not the same as volume ‘© 01 = number of outstanding contracts that are yet to settle / total number of open positions held by market participants at any given time /notional value of all open futures positions etc. ‘© Every long has a corresponding short J every short has a corresponding long: the L/S ratio is always 1:1 (or 50% long/S0% short) ‘* Some scenarios © Bob opens a 1 BTC long. Steve opens a 1 BTC short. 0 = 2 BTC. © Bob opens a 1 BTC long. Steve closes a 1 BTC long. Ol = 1 BTC. © Le. newpostions increase Ol, closing postions decrease O ‘¢ Matket interpretations » Price up + O! up = longs opening © Price up + O1 down = shorts closing © Price down + Ol up = shorts opening © Price down + 01 down = longs closing © Not 100% fixed or my favourite thing to look it, just a rough baseline Can also add CVD to the equation for confluence but not smth | use ‘Similar to funding, use this to provide clues when building a broader picture ofthe market © Price LH + O| HH = more leverage for a weaker move (bearish) Price HH + OI LH = less leverage for a stronger move (bullish) » Price big nuke but relatively small drop in Ol = oh boy, we might have a lot more to unwind (bearish) » Price small ap but big drop in Ol reversal signal (bulsh) © OI ‘fush’ in token-margined futures can be @ good buy signalitrend continuation (they're often paperhands bc of convexity) © Levghtktcap Ratio i.e, how futures-led has @ movelleghrend in the market been, can help set expectations for an unwind I"Howmuch leverage is there in the system? jotom barrel plebs fushed out/shortterm€ @CRYPTOCRED FUNDING & 0! ‘aggressors being absorbed (bulish) © Can also help identity “clusters” of buit up O! abovelbelowey levels and formulating trade ideas therefrom ‘Eg. Breakout, fresh Ol increase above breakout evel, market moves back belowbreakout level without corresponding decrease in Ol —+ trapped traders Resources Coinalyze Leevites Byot BitcoinF uturesinfo Workedia