The bitcoin price has seen a 14% increase this month, marking its best monthly performance in a year, with predictions that it may soon exceed $80,000. However, the perpetual futures market is displaying a contradictory behavior, with funding rates currently below zero.
This divergence has left market participants searching for an explanation, with many interpreting it as a lack of confidence in bitcoin's recent performance. Nevertheless, 10x Research's Founder Markus Thielen attributes this phenomenon to hedging activities by institutions, rather than a bearish play by retail traders. The negative funding rate represents a structural shift in the market, driven by the increasing participation of sophisticated players. Perpetual futures contracts track bitcoin's price without expiring and are kept in line with spot prices through a periodic fee, known as the funding rate.
When futures prices exceed spot prices, longs pay shorts, resulting in a positive funding rate. Conversely, when futures trade below spot, shorts pay longs, and the rate becomes negative. The funding-rate mechanism serves as a real-time gauge of market sentiment. Recently, funding rates have been consistently negative, indicating that shorts are dominating the market, and perpetual futures are trading at a discount to spot price.
According to 10x Research, bitcoin's 30-day average funding rate is negative 5%, compared to the historical norm of positive 8%, representing a 13 percentage point discount to baseline. Thielen identifies three sources of short pressure in the futures market: hedge fund redemptions, institutional trades involving shorting bitcoin futures as a hedge, and bitcoin miners pivoting to artificial intelligence. These factors contribute to the negative funding rate, which is a result of risk management strategies rather than a bearish sentiment towards bitcoin.