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Bitcoin’s overnight pullback from record highs has normalized funding rates in the crypto perpetual futures market.

The market could continue to cool in the coming weeks, one observer said.

Bitcoin’s ($BTC) overnight pullback from new record highs has cleared out excess leverage from the market, normalizing funding rates in the crypto perpetual futures market.

The leading cryptocurrency by market value fell 10% to $59,700 after reaching a new lifetime high above $69,000. The correction led to the forced closure of $1 billion worth of leveraged perpetual futures bets across digital asset markets.

The CoinDesk 20 Index (CD20), a broader market gauge, rose to a high of $2,627 on Tuesday and has since pulled back to $2,496.

Since then, the annualized funding rates or the cost of holding leveraged bets in perpetual futures tied to the top 25 cryptocurrencies have reset to less than 20%, down significantly from triple-digit figures observed a few days ago.

In other words, the overheated perpetual futures market has cooled, opening doors for a more long-lasting move to record highs. Funding rates surged above 100% early this week as bitcoin’s strong bullish momentum saw investors jump in with both feet, using leveraged products to maximize gains.

Exchanges use the funding rate mechanism to keep perpetuals prices aligned with spot prices. A positive funding rate indicates that perpetuals are trading at a premium to the spot price, indicating increased demand for bullish bets. As such, a high funding rate, as seen early this week, is said to reflect over-optimism, often observed at interim market tops.

The chart by Velo Data shows funding rates for the top 25 cryptocurrencies have ranged from mildly positive to as high as 150% or more over the past week.

The latest reading for most coins is below 20%.

According to John Glover, chief investment officer at Ledn, the market could continue to deleverage in the coming weeks., potentially pushing bitcoin’s price back to $40,000.

“The euphoria surrounding the recent rally in $BTCprices is very reminiscent of the last time we were trading at $65k. While many people will point to the fact that the sell-off that ensued post-November 2021 (and previously after April 2021) was due to bad players in the market, I would argue that, while it may have been precipitated by the bad players, the sell-off was due to people being over-leveraged with unrealistic expectations for a straight-line appreciation to $100,000,” Glover said in an email.

“I believe that we are back in that same situation and we will see a correction back to the mid-to-low $40,000 area in the coming weeks. Things always look bullish at the peak,” Glover added.

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