Analyzing on-chain data such as funding costs and open interest can help you understand when the market is overheated and ready for a correction.
Funding rates have not yet reached the values fixed on March 13, before the large-scale correction. But open interest has already grown to a critical level. These on-chain indicators indicate that the market is overheating.
Funding rate
Funding cost is the premium that futures traders pay (or receive) to keep a position open.
If it is positive, those who have long positions (buyers) have to pay. If the funding rate is negative, the short traders (sellers) pay the premium.
Historically, the higher the funding rate, the closer the collapse. And vice versa: if the rate goes deep into the negative, then the market is preparing for a recovery. For example, on March 13, the funding rate reached 0.121%. This means that buyers paid sellers a 0.121% premium for being able to maintain open positions.
Over the next two days, the market crashed and the cost of funding returned to zero.
Now it is 0.072%.
Glassnode. Source: TradingView
The cost of financing will differ on different exchanges.
The most expensive thing now is to maintain a long position on Bybit (0.121%), followed by Binance (0.107%), and Deribit (0.098%) in third. Thus, it is now most profitable to open short positions on these three sites.
The lowest funding rates are currently on Bitfinex (0.00%), FTX (-0.012%) and Kraken (-0.013%).
Glassnode Chart Source TradingView
Open interest
Open Interest is the sum of all open futures positions. However, this value does not tell us anything about the direction in which these positions are opened: buy or sell.
Like funding costs, open interest is especially high when the market is close to a correction. Everything is logically simple here: when prices rise, buyers are gripped by euphoria. When prices fall, a wave of panic selling engulfs the market.
Thus, the highest open interest will be recorded when the market is at a local high (or low).
The total open interest on March 13 was $ 22.77 billion. Now it is $ 22.52 billion.
Glassnode Chart Source TradingView
Binance remains the leader in this on-chain indicator ($ 4 billion). In second place is ByBit ($ 3.5 billion) and closes the top three of OKEx ($ 3 billion).
Glassnode Chart Source TradingView
Conclusion
Open interest and funding costs are close to highs when the market forms a local top. The indicators have already approached the values of March 13, when the market experienced a sharp correction.
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