Bitcoin (BTC) has not gone below $90,000 since November 18, and continues to fluctuate between $90,000 and $100,000.

Sentiment generally turns bullish as bitcoin nears $100,000 and investors try to continue the bull market. However, this also works the other way, and with bitcoin heading towards $90,000, like Thursday, investors are turning bearish.

Bitcoin will move where maximum pain occurs, for now it is the cut period between these two valuations.

Derivatives in bitcoin play a large role in these volatile price swings; derivatives such as futures and options make up only a few percentage points of the total market value, but have a greater impact on the market.

One metric that traders closely observe is the futures perpetual finance rate. This is defined as the average funding rate (in %) set by exchanges for perpetual futures contracts. When the rate is positive, long positions periodically pay short positions. Conversely, when the rate is negative, short positions periodically pay long positions.

During a bull market, bitcoin tends to have a positive funding rate as traders believe the price will continue to rise, but when the market gets overheated, it tends to run out of steam and the price starts to fall , leading to liquidation cascades.

However, the same applies to bear markets, as price floors are developed over the years, prices can rise quickly, leaving traders scrambling to cover. At these moments, local bottoms are formed.

As of Thursday, Glassnode data shows that the funding rate briefly went (-0.001%), the first time this year and only a few times since November. This led to a leveraged flush and a shift in sentiment before bitcoin moved back above $94,000. To compare how mild the negative funding rate was on Thursday, during covid-19 in March 2020, we saw negative funding rates peak at (-0.309%).

A negative funding rate does not always lead to immediate price rises or bottoms, but can be viewed in conjunction with other price charting tools and technical indicators to form a market picture. Negative fund rates could also signal a continued bear market rather than an immediate bottom. Similarly, positive rates during a bull market may not mean the market is overheated, but may reflect continued strong demand.

Since 2023, the funding rate has been mostly positive due to bitcoin being in a bull market, yet it has come with short periods of negative rates, which tend to occur below price bottoms. This was seen during the Silicon Valley Bank collapse in 2023 and 2024, just before bitcoin climbed higher in both years.

A floor tends to emerge when the funding rate turns negative and bears become overconfident. The same thing happens when bulls get complacent and the spot price can no longer keep up with the leverage being used. On both occasions traders tend to get liquidated and in this case it was the bears.