Exploring the Impact of Web 3.0 on Retail Trade

The cryptocurrency market’s capitalization metric has been trading within a relatively narrow upward channel for the past 10 weeks, indicating that bullish momentum has remained intact despite recently failing to break above the $1.7-trillion market cap resistance. In December, Bitcoin’s (BTC) price made 20-month highs above $44,000, and Ether’s (ETH) upswing was stopped at $2,400. But does this excessive demand for leveraged longs (buying) mean that a correction is imminent?

Analysts monitor leverage demand to assess the risk of a sell-off driven by derivatives markets, as well as to learn how to prepare for web 3.0. Regardless of whether the ongoing bullishness has been driven by the expectation of a spot Bitcoin exchange-traded fund (ETF) approval by March, understanding how web 3.0 works and how it is different from web 2.0 is essential for investors to make informed decisions about how to invest web 3.0 and how it will impact business.

Moderately Bullish Bitcoin Position of Pro Traders

In order to understand the attitude of whales and market makers, one should take into account the Bitcoin futures premium, also referred to as the basis rate.

Expert traders favor monthly contracts because there is no funding rate, which makes these instruments trade 5%–10% higher than the regular spot markets, which justifies the longer settlement period.

Data shows that the three-month Bitcoin futures premium has been above the 10% neutral level since December 1, implying excessive demand for long positions.

The 15% premium is not unexpected, considering that BTC’s price increased 11.5% in December. On the other hand, those wishing to bet on a price decrease now have a good cushion, since the futures contract is trading $1,800 above the spot price.

The futures premium will be gone on the expiration date (March 30) for the three-month contract in question. Consequently, arbitrage desks and market makers are motivated to short (sell) the futures and hedge the position by buying spot Bitcoin. This trade, known as “cash and carry,” is similar to a fixed-income market structure.

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BTC, ETH, SOL, XRP funding rates at yearly highs

A perpetual contract, also known as an inverse swap, is the instrument of choice for retail traders looking to leverage their positions. This type of contract has a fluctuating rate, usually charged every eight hours, and its price tends to follow the spot markets instead of the monthly contract premiums.

In this case, a positive funding rate indicates that more leverage is required by long positions (buyers), while short positions (sellers) need less leverage, resulting in a negative funding rate.

It is worth noting that the weekly funding rate has reached a one-year high, ranging from 1% to 1.2% for the top five coins, including XRP (XRP) and Solana’s SOL (SOL), in terms of futures’ open interest.

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Is the crypto market overheated?

The average weekly funding rate of 1.2% may appear to be too high, however most traders are seeking short-term profits and are willing to absorb the cost, even if they are unaware of it.

An excessive level of optimism can cause the rate to stay above 2% for a couple of weeks, unless the asset price faces a sudden decrease or a period of price stability.

During bear markets, the funding rate can remain negative as long as the demand for short positions is greater than the use of leverage for long positions.

Investors’ greed and lack of knowledge regarding the funding rate cost create an environment for high fees during bull runs, so there is no definite limit to what can be deemed excessive.

Judging by the three-month futures premium, there is nothing unusual happening with cryptocurrency futures, meaning there is no risk of massive liquidation due to excessive leverage by retail traders using perpetual contracts.

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