The price of COMP, the governance token of the decentralized finance (DeFi) giant Compound, has been surging while the wider crypto market has entered a correction. Despite the ongoing cryptocurrency market slump, the token has rallied 56% in the past week.
COMP/USDT 4-hour chart. Source: TradingView.com
Unusually low funding rate and spot market accumulation
There are various potential reasons behind the sudden rally of COMP. Traders have pinpointed the unusual market dynamic on futures exchanges, where the token’s funding rate remained heavily negative.
The funding rate of an asset in the futures market drops when sellers aggressively short it. But, when the asset’s price increases with a negative funding rate, it opens the door for a short squeeze.
COMP’s recent rally has likely been fueled by a short squeeze across major futures exchanges. This indicates that while the futures market has been betting against the token, traders in the spot market were busy accumulating it.
This trend suggests that some investors might be speculating on a partnership or a major network upgrade in the near term. Otherwise, the futures market heavily shorting COMP while the spot market buys the token would seem unusual.
A pseudonymous trader emphasized that the negative funding rate of COMP caused shorts to pay longs 0.021% of their positions every hour. For context, if a trader had a $100,000 long position on COMP, at that rate, the funding rate would have been $21 per hour. The trader said:
“Funding is insanely negative on $COMP. Shorts are paying longs 0.021%…