Ether perpetual futures funding rates have risen to unprecedented levels since before the global liquidation event in August. What is the impact on the market?
During this period, major cryptocurrencies such as Bitcoin and Ether plummeted along with stocks, losing more than 20% of their value. In an interview with The Block, derivatives trader Gordon Grant warned that the crypto perpetual futures market remains at risk of similar overleveraged position-driven selling.
The open interest-weighted funding rate is currently 0.0116%, the highest level since July 29, when Ether was trading at $3,316. This surge occurred just before a dramatic 22% price crash in early August, according to Coinglass data.
The August crash was mainly caused by the drop in global stock markets following the Bank of Japan’s unexpected interest rate hike. This move led to the unwinding of the yen carry trade and shocked the market from the outside.
Grant explained that the highly leveraged crypto derivatives market likely amplified the impact of the shock. In an interview with The Block, Grant emphasized that the changing composition of perpetual futures market participants reveals the vulnerability of the crypto market. If an external shock similar to the unwinding of the yen carry trade were to occur again, the market could experience major turmoil again.
Ethereum options strategy increases market risk
In August 2023, significant positions in the market involved oversized Ether overwriters selling calls and hedging with long futures. This strategy caused significant market fluctuations when unwinding occurred. Ethereum’s on-chain activity is growing, especially with new decentralized finance (DeFi) protocols like Ethena attracting users.
Ethena employs a strategy of farming stablecoins to generate delta-neutral yields by purchasing Ether while hedging risk using perpetual futures. However, this approach increases exposure to funding rates and can result in significant losses due to negative interest rates.
“These short positions are now larger than they have been in the past and could essentially spiral out of control if the negative funding environment continues,” Grant warned. With billions of dollars of short futures positions existing against long and staked spot holdings, a sudden drop in funding rates can result in losses reaching tens of millions of dollars within hours. .
Grant also pointed to the role of DeFi lending protocols in these market dynamics. These offer a solution, but compared to traditional financial systems, unlike centralized finance (CeFi) lending, there is no large amount of coins available to borrow to sell short against long futures positions. Market unwinding could be more prolonged and painful.
Chip stocks and geopolitical tensions threaten the market
Several other factors are also influencing the current market situation. There are concerns that high-performing chip stocks such as Nvidia may fall. China’s recent impressive stock market rally is starting to slow, and tensions in the Middle East continue to widen. Combined with the existing leverage in the crypto market, these factors could cause a sharp downturn in the market.
Source: The Block
Grant emphasized the importance of monitoring broader risk assets, such as semiconductor stocks and geopolitical trends. he said:
“This is even more tricky when worms target broader risk assets such as semiconductor stocks, or when geopolitical shocks threaten to rattle the cage of stock market beta agents. There may be pockets of short gamma in and around cryptocurrencies in stock market beta agents such as currencies, even the US election. ”
A specific risk highlighted by Grant was the possibility of large long positions being held in perpetual contracts. In such a scenario, funding rates could rise to unusually high levels and collapse during a liquidation event similar to the one that occurred on August 17, 2023.
Ethereum is currently sitting at the $2,600 level, up 11% year-to-date.
Source: BNC Ethereum Liquid Index
