Bitcoin Futures Funding Rates: Hidden Investment Opportunities

The Bitcoin futures basis and funding rates remain relatively muted in the bullish price trend Report content: - Market update: Bitcoin futures basis and funding rates remain relatively muted - Trend: Upcoming token unlocks increase the demand for hedging - Trend: Ethena's staked USDE yields are stabilizing **Market update** In September, Bitcoin rose from slightly below $53,000 on September 6 to nearly $66,000 on September 27, an increase of around 24.5%. Historically, such a rise in the spot market often leads to a surge in the Bitcoin perpetual contract funding rate, due to the increase in leverage demand. As traders flock to long positions on perpetual contract exchanges, the perpetual contract price may deviate from the spot price, driving up the funding rate. We observed a similar phenomenon when Bitcoin hit a new all-time high in March, but since then, the funding rate has remained relatively stable, sometimes even dipping into negative territory. The September rally also exhibited a similar pattern, with the funding rate hovering around 10%, which is generally considered a balanced level. The funding rate is typically an indicator of the cost of leverage in cryptocurrencies, and when it spikes, the cost of cash and stablecoins also rises. The other key indicator of cryptocurrency capital costs is the Bitcoin (BTC) basis trade. Similar to the funding rate, the BTC basis can also surge during significant upswings in the spot price of Bitcoin. This trade involves a strategy that is uncorrelated to market volatility, where traders buy the spot Bitcoin while selling the nearby futures contract, capturing the spread. When the basis widens, short-term cash becomes more expensive as the trading desk must weigh the opportunity cost of borrowing cash against the potential arbitrage gains. Throughout the rally, the basis remained relatively stable, only experiencing a brief spike between September 24 and 25 before returning to normal levels. Overall, the September rally has only led to a moderate increase in the overall capital costs of the crypto industry. **Key Trends...** **Upcoming token unlocks increase the demand for hedging, as financing rates plummet** As October approaches, several major token unlocks are set to occur, particularly for SUI, APTOS, and TIA. To address these events, venture capital funds, early investors, angel investors, and developers are exploring hedging strategies to lock in prices before the influx of liquidity hits the market. For example, TIA will undergo a large-scale token unlock on October 30, releasing 176.56 million tokens, which accounts for 81.94% of its circulating supply. Of this, around 65.01 million tokens will be allocated to venture capital funds. As the unlock date approaches, the demand for hedging continues to rise. This is reflected in the funding rate of the TIA perpetual contract, which has remained negative and sometimes as low as -400%. This trend indicates that traders are willing to pay a premium to hedge their positions, especially in the absence of alternative over-the-counter hedging options due to supply tightness. **Ethena's staked USDE yields are stabilizing, with funding rates remaining calm** Ethena USDe is a market-neutral synthetic US dollar launched earlier this year, and the staked USDe is an "internet bond" that generates yield based on funding and basis differentials. As the market has been range-bound, the yields have gradually returned to normal levels. sUSDe generates yield through ETH staking and short-term perpetual contract positions, and its yields peaked when Bitcoin hit a new all-time high in March, with funding rates spiking to 70%. This meant that long positions had to pay a premium to short positions to maintain their positions, driving the growth of sUSDe. Since then, the market has cooled, and the ETH funding rate has fallen below 10%. Since March, the sUSDe yield has declined from a peak of nearly 50% to slightly above 10% by the end of September. As the yields have started to decline, the supply has also decreased, from a peak of over $3.5 billion to slightly above $2.5 billion by the end of September. Interestingly, during this period, the proportion of staked USDe supply has increased.