The price of bitcoin has surged by approximately 14% this month, marking its most impressive monthly performance in a year. As a result, many market observers anticipate that the cryptocurrency could soon break through the $80,000 barrier, a level it has not reached since January.
However, the perpetual futures market, which typically mirrors spot price movements, is exhibiting contradictory behavior. Specifically, the funding rate, a metric that indicates whether futures are positioned for a price increase or decrease, is currently in negative territory.
This divergence has sparked intense speculation among market participants, with many interpreting it as a sign that traders are skeptical about bitcoin's recent gains and are preparing for a potential downturn. Nevertheless, according to Markus Thielen, the founder of 10x Research, the situation is more complex than it initially appears. Thielen, who correctly predicted a rally to $125,000 in early 2023, believes that the negative funding rate is primarily driven by hedging activities from institutional investors. Instead of being influenced by retail traders, the negative funding rate represents a structural shift in the market, driven by the increasing participation of sophisticated players.
The funding rate is a crucial metric in the perpetual futures market, as it helps maintain a connection between futures and spot prices. Exchanges use this rate to charge a periodic fee, ensuring that futures prices remain tethered to spot prices.
When futures prices exceed spot prices, indicating aggressive buying in the futures market, long positions pay short positions, resulting in a positive funding rate. Conversely, when futures trade below spot prices, signaling short-selling pressure, short positions pay long positions, and the rate becomes negative. The funding rate serves as a real-time indicator of market sentiment.
Recently, funding rates have consistently been negative, indicating that short positions are dominating the market and futures are trading at a discount to spot prices. According to 10x Research, bitcoin's 30-day average funding rate is currently negative 5%, compared to the historical average of positive 8%. This 13 percentage point discount to the baseline is becoming increasingly negative, even as the price of bitcoin continues to rise. Thielen noted in a client note that the bitcoin funding rate is sending an unusual signal, with the 30-day average at minus 5% compared to the historical norm of plus 8%.
He believes that this discrepancy is not a sentiment shift but rather a structural change in the futures market. Thielen identified three primary sources of short pressure in the futures market. The first is hedge fund redemptions, as crypto hedge funds have underperformed bitcoin by 140% over the past five years, leading to investor withdrawals. During the redemption notice period, these funds short bitcoin futures to neutralize their price exposure, which are mechanical risk-management trades rather than bearish bets.
The second involves two separate institutional trades, both of which require shorting bitcoin futures as a hedge. One trade bets that shares of Strategy, the largest publicly traded bitcoin treasury company, will outperform bitcoin directly, while the other aims to capture the 11% yield on MSTR preferred shares while shorting futures to remove crypto price volatility risk. The third source of short pressure is the growing trend of bitcoin miners pivoting to artificial intelligence. Miners like Hut 8, which has seen a 48% increase in value since April 6, are reducing their bitcoin production and increasing their support for AI computing.
Funds buying these stocks are simultaneously shorting bitcoin futures to eliminate crypto correlation from the trade, which is a risk management strategy rather than an outright bearish play in bitcoin futures.