The market capitalization of popular meme coin Pepecoin (PEPE) has soared above $500 million in just two weeks after its launch. However, its perpetual contract funding rate is still negative, which shows the dominance of short sellers in the derivatives market.
A perpetual futures contract is an agreement with no expiration date to buy or sell an underlying asset at a predetermined price. Exchanges offering perpetual futures contracts calculate funding rates, or the cost of taking long (up) and short (down) positions, to keep prices linked to the spot market.
Funding rates show bears in dominance, willing to pay longs to continue bearish bets. In other words, most traders expect prices to fall. A positive funding rate does the opposite.
Negative funds rates may stem from purely bearish speculation. Or they could mean hedging, where traders and investors initially permanently short futures contracts to protect their long positions in the spot market from potential slippage.
Hedging is likely the main reason for the PEPE funding rate, which has been negative since day one, as small-cap coin memes tend to be more volatile than bitcoin and ethereum, and can fluctuate wildly over short periods of time.
Funding rates have been negative since day one | Source: Coinlass
While funding rates point to a bearish sentiment, they also signal a potential short squeeze, a rally triggered by the massive liquidation of short positions. The strength of sellers in the market means prices need to move lower, or funding rates will become a burden to bears.
According to data tracking platform Laevitas, the recent rally in PEPE may have been driven in part by a short squeeze.
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