Crypto Derivatives Funding Rates Sink to 3-Year Lows — Could a Bullish Reversal Be Next?

Funding Rates Hit 3-Year Lows After Historic Market Liquidations

Funding rates across major crypto derivatives markets have dropped to levels not seen since the depths of the 2022 bear market, as billions in leveraged long positions were wiped out following last week’s market crash.

According to on-chain analytics firm Glassnode, this marks “one of the most severe leverage resets in crypto history.” The firm noted that speculative excess has been “aggressively flushed from the system,” creating a cleaner setup for future price stability.

What Are Funding Rates — and Why Do They Matter?

Funding rates are periodic payments between traders who hold perpetual futures contracts, helping keep their prices aligned with the underlying spot market.

When funding rates turn deeply negative, it means there are more short positions than longs, reflecting bearish sentiment. However, extremely low or negative funding rates can sometimes indicate an oversold market, setting the stage for a short squeeze — where rapidly rising prices force shorts to buy back positions, pushing the market higher.

Are Low Funding Rates a Bullish Signal?

Historically, ultra-low funding rates have preceded price rebounds in Bitcoin and other cryptocurrencies. This pattern may be repeating now.

According to data from CoinGlass, around 54% of traders currently hold bullish or very bullish sentiment, while 29% remain bearish and 16% neutral. The long/short ratio also skews toward optimism, with long positions accounting for 60% of the market.

Despite this shift, funding rates remain slightly negative across Bitcoin (BTC) and Ether (ETH) perpetual swaps, suggesting lingering caution among traders.

Spot Market Recovery Gathers Momentum

Spot prices are already rebounding after last week’s dramatic correction.

• Bitcoin (BTC) has climbed over 5%, rebounding from below $110,000 on Sunday.

• Ether (ETH) has recovered 12%, bouncing back from its lows under $3,800.

This rapid rebound may suggest that markets have found a short-term bottom, especially as derivatives positions reset to more sustainable levels.

A Record-Breaking “Crypto Black Friday”

The crash that preceded this reset is being called one of the largest liquidation events in crypto history.

According to TradingView, total crypto market capitalization briefly dropped by 25%, wiping out nearly $1 trillion in value within hours.

Analysts reported that 1.6 million traders were liquidated as leveraged long positions collapsed in response to Donald Trump’s 100% tariffs on China.

The cascade triggered Bitcoin’s first-ever $20,000 red candlestick, representing a $380 billion drop in market cap before a swift V-shaped rebound as shorts were forced to close.

The Kobeissi Letter described the event as “nine times larger than the previous record liquidation,” underscoring just how extreme the leverage flush was.

Why Leverage Resets Often Lead to Healthier Markets

Massive liquidation events, while painful in the short term, are not necessarily negative for the crypto ecosystem. Analysts often view them as “market cleansing” moments, where excessive leverage and speculation are flushed out, allowing for more organic price discovery and renewed growth.

With sentiment slowly turning positive and the majority of overleveraged positions cleared, analysts suggest the crypto market may now be positioned for a period of recovery and consolidation — or even a potential rally if demand strengthens.

Conclusion: A Reset Before the Next Rally?

The collapse in crypto derivatives funding rates signals a major reset after months of speculative buildup. While fear dominates the short-term narrative, data shows growing bullish sentiment and a possible foundation for a short squeeze-driven recovery.

If Bitcoin and Ether maintain their rebound momentum, this historic leverage flush could become the catalyst for the next leg of the crypto bull cycle.

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