There is an old saying on Wall Street: Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
LUNA, the native token of the smart contract blockchain Terra, has nearly doubled to record highs above $90 in December, extending a four-month winning trend and decoupling from the weak trend in other top coins.
Such stellar rallies often translate into euphoria – a situation characterized by risky directional bets and excess bullish leverage and usually observed at market tops. However, LUNA’s market shows no such signs, with derivatives data signaling investor caution.
“People appear to be shorting LUNA perpetual futures, as evidenced from rising open interest and persistent negative funding,” Swiss-based crypto derivatives tracking platform Laevitas told CoinDesk in a Twitter chat.
Open interest represented by the amount of dollars locked in the perpetual futures contracts has doubled to $394 million since Dec. 15. Indeed, the metric does not tell us whether the market is skewed bearish or bullish. But when combined with the funding rates, it provides insights on what traders have been doing.
In LUNA’s case, funding rates have consistently stayed negative since Dec. 15, a sign that short position traders have been dominant and paying long traders.
Perpetuals are futures without expiry. Exchanges use the funding rate mechanism to ensure perpetuals are priced around the underlying asset’s market price. As discussed in the explainer, the funding rate is paid every eight hours.
According to Delphi Digital, negative funding rates across major exchanges signal the presence of delta-neutral traders – people who take multiple positions to neutralize delta exposure or directional bias.
“The price increase over the last few days was likely triggered by investors buying spot LUNA to lock up in the Astroport lockdrop, then hedging their position via perpetual futures to remain delta neutral,” analytics firm Delphi Digital said in a research note published Monday.
Astroport, a new decentralized exchange, went live on Dec. 14 with a lockdrop facility airdropping ASTRO tokens to users who lock up their liquidity in the protocol.
The lure of making free money via lockdrop seems to have drawn investors to Astroport, taking out LUNA supply from the market. According to data source DeFi Llama, the DEX has pulled in more than $1 billion into the Terra ecosystem. More than 50% of that figure consists of LUNA tokens.
In October, Terra announced the implementation of proposal 44 to burn 90 million tokens held in the community pool, taking a page out of Ethereum’s EIP-1559 upgrade that introduced the supposedly-deflationary ETH burn mechanism.
Also read: Terra Becomes Second-Largest DeFi Protocol, Surpassing Binance Smart Chain
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