Ethereum Funding Rate Turns Negative; Is A Short Squeeze Ahead?

Ethereum (ETH) started the week on a somber note, extending its losses from Sunday. Concerns escalated earlier on Monday as reports emerged of Vitalik Buterin’s transfer of approximately 400 ETH to Coinbase, intensifying fears of further price declines.

The second largest cryptocurrency has recently been caught in a web of tight price consolidation after several rejections at the $1,650 resistance level, causing concern among traders and sparking a surge in negative funding rates in the cryptocurrency futures market.

Ethereum Negative Funding Rates Surges

Cryptocurrency funding rates mirror market sentiment, signifying periodic payments between traders to align perpetual futures contract prices with underlying assets. Positive rates signal bullishness, while negative rates indicate bearishness. Ethereum’s recent narrow trading range has resulted in persistently negative funding rates, fostering a pessimistic outlook as traders brace for potential ETH price drops.

Notably, “Greatest Trader” a pseudonymous analyst with popular crypto analytics firm CryptoQuant emphasized this trend in a post shared by the firm today.

“As the price of Ethereum has entered a consolidation phase following a period of sharp declines, the funding rates have also turned negative. This indicates that futures traders have adopted a pessimistic outlook on ETH, enhancing the possibility of a further price drop.” He wrote.

• The Potential for a Short Squeeze

While prolonged periods of negative funding rates typically suggest a bearish market, they can also set the stage for a short squeeze, or a scenario where short sellers are forced to buy back their positions to cover their losses, resulting in a sudden price rebound. “Greatest Trader” further underscored the likelihood of such a sequence, explaining, “Consistent negative funding rates bear the potential to initiate a chain reaction of short liquidations, which, in turn, could catalyze an abrupt price rebound.”

Whales and Traditional Investors Prepare for Volatility

In a related development, Ethereum options on the Chicago Mercantile Exchange (CME) have hit a record high of $352 million in open interest, signalling a spike in interest from traditional investors. This coincides with rising expectations of an Ethereum futures Exchange-Traded Fund (ETF) approval scheduled for next week.

This surge in open interest indicates investor positioning for a potential bullish outcome, with data from Santiment showing Ethereum whales holding between 100,000 ETH and 1,000,000 ETH accumulating just over 1 million ETH after the September 11 price dip. Afterwards, the cryptocurrency witnessed a noteworthy uptick indicating significant accumulation by big investors.

At press time, Ethereum price was trading at $1,574 after a 1.19% drop over the past 24 hours according to CoinMarketCap data.