In bearish market conditions, small-cap cryptocurrencies often experience short squeezes on major exchanges, leading to deeply negative funding rates. When funding rates drop below -0.5%, traders commonly adopt one of two strategies:
- Go long before funding payment to collect the negative funding rate.
- Go short just before settlement and close the position immediately after, aiming to profit from the downward pressure caused by long liquidations.
Using historical market data from Binance, this analysis explores the statistical profitability of these two approaches—focusing solely on price movement without factoring in external variables. The goal is to determine, from a probability standpoint, which strategy offers higher success rates during periods of extreme negative funding.
Note:
- High negative funding rate refers to values greater than -0.5%.
- Extreme negative funding rate refers to values greater than -1.5%.
- This study is based on historical data and does not constitute investment advice.
Overall Market Observations
Since 2023, Binance has recorded 376 instances where funding rates exceeded -0.5%, with an average rate of -1.209%. Of these, 113 cases (30.2%) reached extreme levels above -1.5%, indicating that once funding turns significantly negative, there's a notable tendency for it to deepen further.
To assess potential profits, we analyzed price movements across multiple timeframes:
- Short-term: 1-minute, 3-minute, and 5-minute intervals
- Long-term: 4-hour, 8-hour, and 24-hour periods
For short-term analysis, both lowest price and closing price were used—since manual traders rarely exit at exact lows. For long-term trends, highest price and closing price were evaluated to understand sustained upward momentum.
Closing prices help filter out flash crashes or spikes, offering a more stable benchmark for comparison.
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Short-Term Performance Analysis
During the immediate period following funding settlement, price action tends to be highly volatile. Here are the average results observed:
- 1-minute maximum drawdown: 1.90%
1-minute closing decline: 1.11% - 3-minute maximum drawdown: 2.12%
3-minute closing decline: 1.05% - 5-minute maximum drawdown: 2.26%
5-minute closing decline: 1.07%
Key Insights:
- The average funding rate is -1.209%, yet most short-term closing declines remain below this threshold—suggesting that longs closing right after funding collection often end up losing money.
- Maximum drawdowns consistently increase over time (from 1 to 5 minutes), while closing prices stabilize—indicating a W-shaped recovery pattern.
- This volatility creates favorable conditions for shorts, who can profit from the initial drop and retest lows before rebounding.
A sample of ten tokens showed consistent W-shaped patterns post-funding, confirming rapid sell-offs followed by partial recoveries.
Long-Term Price Behavior After High Negative Funding
Looking beyond the immediate aftermath reveals a different trend:
- 4-hour maximum gain: +3.73%
4-hour closing change: -1.29% - 8-hour maximum gain: +5.84%
8-hour closing change: -1.36% - 24-hour maximum gain: +9.50%
24-hour closing change: -3.34%
What This Tells Us:
- While peak prices rise over time, closing prices remain negative—pointing to an M-shaped price trajectory, where gains are eventually erased.
- Despite temporary rallies, most of these high-negative-funding episodes resolve within 24 hours.
- Although longs may capture significant intraday gains, holding through the full cycle often results in losses unless exited strategically at highs.
This suggests that while funding collection doesn’t mark the end of a rally, it often precedes a reversal—especially if the broader market remains weak.
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Frequency vs. Funding Rate: Is There a Pattern?
We examined how frequently certain tokens hit high negative funding levels in 2023. Out of 66 tokens analyzed:
- Nearly half experienced only one instance of high negative funding.
- Just 9 tokens had more than 10 occurrences.
Notably:
- Average funding rate did not correlate strongly with frequency.
- Tokens like LPT and TRB reached full negative funding (-2.5% or -3%) during hype cycles, but spent extended periods at moderate negative levels before and after.
Cumulative funding income can exceed 15% over time for frequently occurring events—potentially lucrative for persistent long-position holders.
Does Higher Negative Funding Mean Stronger Price Moves?
Short-Term Impact
Across all categories:
- The deeper the negative funding, the sharper the initial drop.
- However, closing prices tend to stabilize near the funding rate level, meaning extreme drops don’t always translate into sustained downside.
The W-shaped pattern persists regardless of severity—offering repeated shorting opportunities within minutes.
Long-Term Impact
Despite larger intraday swings:
- There’s no significant correlation between funding depth and long-term upside.
- Even in extreme cases (> -1.5%), rallies fail to sustain beyond 8–24 hours.
- Faster resolution times suggest market efficiency—the opportunity window for longs is narrow.
How Past Frequency Affects Future Moves
Short-Term Outcomes by Token Type
Tokens with Only One High-Negative-Funding Event (29 instances):
- 1-minute max drop > funding: 97% win rate for shorts
- Closing-based profit: ~50% success
- Clear short-term edge, but less predictable closes
LPT (32 events):
- Max drop > funding: 100% across all intervals
- Closing profit: ~69–84% success
- Reflects stronger, more consistent downside pressure due to recurring squeeze dynamics
BLZ (61 events):
- Max drop > funding: 100%
- Closing profit: ~62–75%
- Similar to LPT—high-frequency tokens show amplified short-term bearish momentum
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Long-Term Strategy: Can Longs Still Win?
Even with frequent reversals:
- All tokens reached highs exceeding funding rates within 4–24 hours (100% occurrence)
- But only about one-third saw closing prices surpass funding levels
This highlights a critical challenge: while upside potential exists, timing the exit is key. Most gains are fleeting.
Moreover, selecting tokens based on past squeeze frequency introduces sample bias—these are already known "squeezable" assets and may behave differently going forward.
Still, the data supports a nuanced view:
✅ Funding collection isn’t the end of the rally
❌ But holding too long leads to profit erosion
Final Verdict: Which Strategy Wins?
Based on Binance data from 2023:
| Strategy | Timeframe | Profitability |
|---|---|---|
| Long before funding payment | Short-term (<5 min) | Low – price drops fast |
| Long-term (4–24h) | Moderate – upside possible, but hard to capture | |
| Short before settlement, close after | Short-term | High – consistent drops offer reliable exits |
| Long-term | Not applicable – designed for quick gains |
Bottom Line:
- 🔻 Short-term: Shorts dominate. The W-shaped dip-and-recover pattern gives clear entry and exit signals.
- 🔺 Long-term: Longs have a slight edge, but require precise timing and risk tolerance.
- 📊 For systematic traders, combining both—shorting the initial dump and flipping long on recovery—may yield optimal results.
Frequently Asked Questions (FAQ)
Q1: What causes extremely negative funding rates?
Negative funding occurs when more traders are short than long on perpetual contracts. To balance the market, shorts pay longs—a mechanism that incentivizes buying during oversold conditions.
Q2: Should I always short when funding drops below -0.5%?
Not necessarily. While statistics favor shorting immediately post-settlement, extremely oversold conditions can trigger rapid reversals. Always assess volume, order book depth, and overall market sentiment.
Q3: Can I profit just by holding long positions to collect funding?
Yes—but only if the price doesn’t crash afterward. High-frequency tokens like LPT or BLZ offer recurring income potential, but carry duration risk.
Q4: Why do W-shaped and M-shaped patterns appear?
The W-shape reflects panic selling post-funding, followed by stabilization. The M-shape indicates a failed rally—initial momentum fades as bears regain control within 24 hours.
Q5: How often do high-negative-funding events occur?
On Binance, over 370 instances occurred in 2023 alone—roughly once per day across various altcoins. They’re most common during low-liquidity periods or sudden pump-and-dump scenarios.
Q6: Is this strategy applicable in bull markets?
Less so. In strong uptrends, high negative funding often signals continuation rather than reversal—longs keep accumulating despite costs. Always contextualize within broader trends.
By understanding the statistical tendencies behind funding rate extremes, traders can make informed decisions—not based on emotion, but on empirical patterns backed by data. Whether you lean toward aggressive shorting or patient yield harvesting, timing and precision remain paramount.