Despite Bitcoin and Cryptocurrencies Soaring, a Derivatives Trader Issues a Warning About the Market

Ethereum’s perpetual-term funding rates have risen to levels not seen since the global liquidation event in August, raising concerns about potential long-leveraged liquidations.

The incident, which saw major cryptocurrencies like Bitcoin and Ethereum fall more than 20% along with stocks, is still fresh in investors’ minds. Derivatives trader Gordon Grant warned that the crypto futures market remains vulnerable to similar sell-offs driven by over-leveraged positions and a mix of technical and macroeconomic factors.

According to Coinglass data, the open interest (OI) weighted funding rate reached 0.0116%, the highest level since July 29, when ETH was trading at $3,316 just before a 22% price drop in early August. The crash was largely triggered by the Bank of Japan’s surprise rate hike, which led to the unraveling of the yen carry trade and a pullback in global stock markets. Grant explained that while the initial shock was external, the highly leveraged crypto derivatives market may have amplified the impact.

Grant said in an interview that the current structure of the perpetual futures market could expose cryptocurrencies to another sell-off if there is an external shock similar to the yen-carry trade unraveling that triggered the August liquidation. He added that changes in market participant behavior and the rise of highly leveraged positions pose risks to ETH and other cryptocurrencies.

Grant highlighted additional factors weighing on the market, including potential pullbacks in Nvidia and other chipmaker stocks, a slowdown in China’s stock rally and investor caution over rising tensions in the Middle East. These factors, combined with the high leverage in the crypto market, could trigger or exacerbate a sudden market decline, especially if options-based liquidations are triggered.

“There is more reason to pay attention when broader risk assets like chip stocks are moving higher or when geopolitical shocks threaten equity market beta proxies, including crypto, where there could be short gamma exposure around the US election,” Grant said.

Grant warned that the current funding environment could lead to overly long positions in perpetual futures, pushing rates higher to see a sharp decline if liquidations occur, similar to the events of August 17, 2023. He pointed to an example from last year where a large ETH options trader went long and hedged with long futures, contributing to significant market volatility when unwinds occurred.

“There are now larger short positions than ever before, and that can spiral out of control in a persistently negative funding environment,” Grant added. With billions of dollars of shorts against long and staked spot assets, a sudden change in funding rates could lead to losses of tens of millions of dollars in a matter of hours, potentially forcing positions to be closed and worsening adverse market conditions, Grant warned.

*This is not investment advice.