In this lesson
- learn to read funding as a mood thermometer
- understand what open interest shows
- find out how a liquidation cascade happens
In the previous course we said that leveraged futures are not for beginners. That still holds. But the leveraged market is huge and its data is public – and it reveals how overheated the market is, even if you only trade on spot.
Funding as a thermometer#
A reminder: funding is paid between perpetual futures traders to keep the contract price close to spot. When the contract trades above spot (more demand for longs), longs pay shorts.
What interests us is how high funding is. Annualised, it shows how much people are willing to pay to bet on a rise with leverage:
- The median daily funding for Bitcoin since 2021 comes to roughly 9% a year.
- In February 2021 the weekly average was over 120% a year – the market was full of leverage.
- In March 2024, around the high at the time, around 50% a year.
- After the collapse of the FTX exchange in November 2022, funding was negative – more people were betting on a fall.
- BTC funding (% a year)
Open interest#
The indicator open interest is the number of open contracts – how much leveraged money is in the market right now. It is read together with the price:
- price rises and open interest rises – new leverage is flowing in; the rally has fuel, and risk,
- price rises and open interest falls – shorts are closing positions, often a short-lived spike,
- price falls and open interest drops sharply – positions are being closed or liquidated.
A liquidation cascade#
When there is a lot of leverage in the market, a smaller move is enough to start liquidations. The exchange sells liquidated longs at market – which pushes the price down, which triggers more liquidations. A cascade forms that throws the price far beyond a "reasonable" level for a few hours. That is where the long wicks on daily candles come from – like on 5 March 2024 or 5 August 2024.
How to use it#
- Extremely high funding = caution. It does not say the price will fall tomorrow. It says the market is crowded and a fall could be sharp.
- Negative funding in a crash = fear. A market full of shorts can shoot up quickly once the shorts start covering.
- Derivatives data is context, just like macro. It is part of your picture of the market, not a trading signal.
An overheated market can stay overheated for a long time
High funding can last for weeks while the price keeps rising. Anyone betting against the market because of it pays just like someone who sells only because RSI is above 70.
Common myths#
- "Funding is high, so I am shorting." A crowded market can rise for longer than you can hold out.
- "Open interest is rising, so the price will rise." Only the amount of leverage is rising – on both sides.
- "I do not trade futures, so it does not concern me." Liquidations on futures move the spot price too.
Summary
- Annualised funding shows how much people pay for leverage on a rise; extremes signal overheating or fear.
- Open interest = the amount of leverage in the market; read it together with the price.
- Liquidation cascades turn smaller moves into sharp drops and long wicks.
- Derivatives data is context, not a trading signal.