Right now -- they signal an opportunity in AI.

We build our algos using on-chain data, pricing data, and degen leverage. The last of these is among the best data sources we have, but few understand them.

Today, I'll give you a walk-through to explain the AI opportunity.

First up, why does it work?

Cramer, in fact, is roughly 50/50 with his picks, which is statistical chaos. Inversing him isn't going to help your portfolio much.

There is a mechanic that makes over-leveraged degens likely to lose money: liquidation.

To use leverage, you need collateral. If your trade goes wrong, you can fall below the required collateral level and you lose everything.

Notably: if you are short, then your position will be forced to buy. If you are long, your position is forced to sell.

Liquidation forces price in the opposite direction.

You can get a sense of whether too many traders are going to be liquidated by looking at funding rates.

Perpetuals are a kind of future for cryptocurrencies that have no expiration date.

Say that you have $BTC futures, how do we make sure that these track (roughly) $BTC's underlying price?

There is a mechanism called the funding rate, whereby if the position is too long or too short you pay the other side a fee.

If that fee is excessively high--say above 20% or below -20%--then you have an indicator that the price might go the other way soon. (See image)

The image above shows you the annualized funding rates for various coins across various exchanges.

The image below "zooms in" on just the AI agent coins -- VIRTUAL and GOAT. You can see that they're in red boxes.

That's because their funding rates are consistently too high -- at 50% - 148%.

What that suggests is that traders are over-eager with those and that they are likely to melt down with liquidations.

If we focus on just the main AI cryptos -- $NEAR and $TAO -- you can see that they're much more reasonably priced.

Their funding rates range mostly between 10% and 20%.

While there is interest in the AI sector, the "large-cap" AI coins are at much less risk of decline by liquidation.

There is one coin, $ONDO, which has an excessively negative level. You'll notice that its funding rates are persistently between -50% and -117%.

Does that mean it might see a possible melt-up? NO.

This indicator needs some context. $ONDO is going to experience a massive token unlock in 8 days.

Original VCs are going to DUMP on the market forcing the price down. Everyone knows this, and that's why the inverse perpetual trade is overcrowded.

Wait until after the unlock to touch $ONDO.

Concluding Thoughts

Now you know:

(1) why betting against degens works -- because of the liquidation mechanic,

(2) how to measure degen bets -- looking for funding rates above 20% or below -20%

(3) where the AI opportunity presently lies -- large cap AIs and NOT agentive AIs

(4) why funding rates sometimes need context -- such as the $ONDO trade

Happy Trading!

-Sebastian Purcell, PhD

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