Ether's perpetual futures funding rates have increased to levels not seen since before August's global liquidation event, when major cryptocurrencies like bitcoin and ether posted declined with stocks, losing over 20% of their value. Derivatives trader Gordon Grant cautioned that the crypto perpetual futures market remains vulnerable to similar over-leveraged position-driven sell-offs, potentially catalyzed by a combination of technical and macroeconomic factors.
The OI-weighted funding rate stands at 0.0116%, the highest since July 29, when ether was trading at $3,316, just before a 22% price crash in early August, according to Coinglass data. That crash was largely triggered by a global stock market rout after the Bank of Japan unexpectedly raised interest rates, which led to a yen carry trade unwind. While the initial shock was exogenous in nature, Grant explained that the highly leveraged crypto linear derivatives futures market may have magnified the impact.
Speaking to The Block, Grant said that changes in the topography of perpetual futures market participants indicate vulnerabilities for the cryptocurrency market in the event of another such exogenous shock, similar to macro events like the yen-carry trade unwind that ignited the liquidation event of early August.
Other factors are also influencing the market, he said. For example, investors are cautious about potential pullbacks in Nvidia and other high-performing chip stocks, the slowing of China's recent impressive stock rally, and the continued spread of tensions in the Middle East.
Ethereum futures funding rates have surged to positive highs not seen since just before the early August flash crash. Image: Coinglass
He suggests that these factors, combined with existing leverage in the crypto market, could catalyze or exacerbate a sharp, even if brief, market downturn, particularly in conjunction with options-driven liquidations.
“This is all the more reason to watch out when the worm turns on broader risk assets such as chip stocks or when geopolitical shocks threaten to rattle the cages of equity market beta proxies, including crypto where pockets of short gamma may exist in and around the U.S. election event,” Grant added.
Grant also gave a specific risk being the possibility of a large long being carried in perps, which would push up funding to abnormally high levels only to see it plummet in an eventual liquidation such as happened on Aug. 17, 2023.
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“In August 2023, a market position such as an outsized ether overwriter who sold calls, and may have chosen to hedge with long futures that contributed to significant market vicissitudes at that time when eventual unwinds occurred,” Grant added.
In particular, Ethereum's onchain activity has grown as new decentralized finance protocols, such as Ethena, attract users. Ethena's strategy involves farming stablecoins to generate a delta-neutral yield—buying ether while simultaneously hedging risk using perpetual futures. However, this type of strategy increases exposure to funding rates, and negative rates could lead to substantial losses.
“There are now bigger positions than before carrying such shorts which could essentially spiral out of control in a persistently negative funding environment,” Grant added.
With billions of dollars in short futures positions against long and staked spot holdings, a sudden downturn in funding rates could lead to losses in the tens of millions within hours.
“This could necessitate position closures and further accentuate the swing to negative basis conditions,” he added.
Grant also pointed to the role of DeFi lending protocols in these market dynamics. While they offer some solutions, the lack of large blocks of coins available for borrowing to short against long futures positions — such as have existed in CeFi lending for a long time — means that market unwinds could be more prolonged and painful than in traditional finance.