Since Sep. 5, many trades in the Bitcoin (BTC) futures market have been seemingly net short. As the majority of placed bets against BTC, the funding rate of BTC futures contracts turned negative.
But in the last 30 hours, the price of Bitcoin increased from $10,211 to as high as $10,878 on Coinbase. The large amounts of shorts in the market are fueling the recovery of BTC for three reasons.
The three factors are low funding rates, the likelihood of a short squeeze, and the implications of defending the $10,000 support level.
Low funding rates benefit Bitcoin
The Bitcoin futures market implements a mechanism called “funding.” In a nutshell, funding incentivizes traders longing BTC or betting on it to increase in price if the market is majority short, and vice versa.
As such, when most of the market is actively shorting Bitcoin, then short contract holders have to compensate long holders. The problem occurs when funding rates remain negative