Ethereum's Perpetual Futures Funding Rates Surge

Ether's perpetual futures funding rates have risen to levels not witnessed since before August's global liquidation event, during which major cryptocurrencies like Bitcoin and Ether declined significantly alongside stocks.

Derivatives trader Gordon Grant warned that the crypto perpetual futures market is susceptible to over-leveraged sell-offs, driven by a blend of technical and macroeconomic factors.

According to Coinglass data, the OI-weighted funding rate is currently at 0.0116%, the highest since July 29, when Ether traded at $3,316, just before a 22% price drop in early August due to a global stock market downturn. This downturn was largely triggered by the Bank of Japan's unexpected interest rate hike, which caused a yen carry trade unwind. Grant noted that the highly leveraged crypto derivatives market could magnify such shocks.

In an interview with The Block, Grant highlighted vulnerabilities in the cryptocurrency market due to changes in perpetual futures market participants. He noted that a combination of factors—including concerns over the performance of chip stocks, China’s slowing stock rally, and geopolitical tensions—could lead to an abrupt market downturn, particularly in conjunction with options-driven liquidations.

Grant emphasized the importance of monitoring market conditions and risks surrounding broad assets and geopolitical events, as pockets of short gamma may exist around events like the U.S. elections.

He also identified risks regarding large long positions carried in perpetual contracts, which could lead to significantly high funding rates before an inevitable liquidation akin to the events of August 17, 2023.

Furthermore, Ethereum's onchain activity has expanded, spurred by new DeFi protocols like Ethena, which engages in stablecoin farming for delta-neutral yield by simultaneously buying Ether and hedging with perpetual futures. However, such strategies increase exposure to funding rates, putting investors at risk of substantial losses. Grant noted that current positions could spiral out of control in a persistently negative funding environment.

With billions in short futures against long and staked spot holdings, a sudden drop in funding rates could lead to losses reaching tens of millions within hours, necessitating position closures and exacerbating negative conditions.

Grant remarked on DeFi lending protocols' role in the current dynamics, stating that while they provide solutions, the lack of substantial coin blocks for borrowing means market unwinds could be prolonged and more painful than in traditional finance.