BitMEX co-founder Arthur Hayes noticed negative perp funding on several well-known exchanges such as Gate, Binance, and his own BitMEX. He attributed the negative funding rate to a wealthy ‘cohort’ who have been selling heavily into digital asset markets.
Perp is shorthand for ‘perpetually rolling swap contract,’ a popular crypto derivative. As opposed to a real swap, perps have no expiration and use a funding mechanism to anchor contracts to underlying spot prices.
BitMEX was once the world’s largest perp exchange, famously offering up to 100X leverage on perps. In fact, BitMEX claims to have invented the perp. Conveniently, co-founder Hayes also co-owned a second, secret, for-profit entity that prevailed as the winning party against his customers’ perp liquidations.
Years later, Hayes pled guilty to unrelated criminal charges for violating the Bank Secrecy Act.
Today, BitMEX has a new CEO. Even so, the exchange still provides advanced trading products for digital assets, including its signature perpetual swap contract.
What could explain negative perp funding?
Negative perp funding rates are rare but not unprecedented. Funding for bitcoin perpetual swap contracts previously experienced a negative streak that started on May 18, 2021, and lasted over a month.
One simple explanation for negative perp funding is wariness about holding assets with centralized custodians. Many large custodians like FTX have gone belly-up. Funding perps requires holding funds on risky, opaque exchanges.
Perpetual funding can go negative when short positions need additional leverage, also known as margin. This negative perpetual funding can indicate a lack of demand for long positions, indicating that traders who deal in futures aren’t confident that the underlying asset’s price will rise.
Similarly, Hayes called it odd that perpetual funding would be negative, with the rates ranging from -0.0002% on OKX to -0.0817% on CoinEx. Those percentages might seem insignificant until one considers that perpetual funding rates are typically measured in hundredths of one percent.
Perps mimic spot trading while providing higher leverage with a funding rate, typically an eight-hour interest rate. Bitmex’s perpetual swap contract can typically stay close to spot prices by having the funding rate favor traders who don’t force the perpetual swap contract’s market price to deviate substantially from the spot price.
For example, CoinFLEX makes its perpetual swap contract deliverable. Periodic settlement resolves imbalances by enforcing a repurchase agreement or “repossessing” long or short positions to sell in a Dutch auction.
Finally, it’s worth considering that most crypto prices have rallied anomalously this year. The combined market capitalization of all CoinMarketCap listings has rallied 58% year-to-date. As a result, perhaps institutional traders are having difficulty maintaining their bitcoin hedges amid this heightened volatility. Alternatively, perhaps a cohort of traders is putting sell pressure on bitcoin so they can ‘buy the dip’ before the next bull run. Or perhaps it’s exchange risks, margin rates, or another explanation altogether.