Why can negative funding rates actually be bullish?

The open interest in the futures market is always 1:1 between long and short positions; when ignoring transaction costs like fees, funding, and slippage, profits and losses are nearly zero-sum, meaning the money gained by longs is lost by shorts.

Therefore, to open a short position, there must be an opposing order—either a short position closing or a long position opening with the same size.

If a “new short opening vs. old short closing” match occurs, the open interest (OI) remains unchanged; if a “new short opening vs. new long opening” match occurs, the OI increases.

As of yesterday, the OI has returned to recent highs (472,000 BTC), indicating that new positions are being re-accumulated in this market cycle, with leverage being stacked (of course, this includes directional bets and hedging funds).

Since perpetual contracts “never settle,” without any mechanism, their prices could diverge infinitely from the spot price. To anchor the contract price to the spot, the “funding rate” mechanism was introduced.

Although long and short positions are symmetric, the active trading directions are not.

When everyone rushes to short, causing the perpetual price to fall below the spot (negative premium), shorts have to pay longs. In other words, those shorting need to pay to find counterparties.

So, the rate you see isn’t indicating more shorts, but rather that shorts are more proactive.

At peak yesterday, shorts paid an average of $604,000 per hour to longs; although less than the peak on 4/17 ($790,000), it still far exceeds the 7-day average ($197,000).

This is a huge cost pressure!

Shorts burning money to maintain their positions, and the longer they hold, the less profitable it becomes. Once the price rebounds, these shorts will either close voluntarily (buying back) or be forced to close (liquidation).

Both scenarios can trigger a short squeeze, fueling the rally.

Of course, it’s not that “negative rates” always cause short squeezes. But the higher the OI and the more severe the negative premium, the more likely it is to trigger one.

Not guaranteed, but very likely.