The price of bitcoin has risen by approximately 14% this month, marking its best monthly performance in a year. As a result, many expect the price to soon exceed $80,000, a level not seen since January. However, the perpetual futures market, which typically mirrors spot price movements, is behaving differently. Specifically, the funding rate, which is positive when futures prices are expected to rise and negative when they are expected to fall, is currently below zero.
This divergence has left market participants searching for an explanation. While some view the negative funding rate as a sign that traders lack confidence in bitcoin's recent performance, 10x Research's Founder Markus Thielen attributes the situation to hedging activity by institutions.
According to Thielen, the negative funding rate represents a structural change in the market, driven by the increasing participation of sophisticated players. Perpetual futures contracts, which track bitcoin's price without expiring, are used to keep futures prices tied to spot prices. Exchanges charge a periodic fee, known as the funding rate, to maintain this relationship.
When futures prices are higher than spot prices, longs pay shorts, and the funding rate is positive. 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. In recent weeks, funding rates have been consistently negative, indicating that shorts are dominating the market and perpetual futures are trading at a discount to spot price.
Bitcoin's 30-day average funding rate is negative 5%, compared to the historical norm of positive 8%, according to 10x Research. Thielen identifies three sources of short pressure in the futures market. Firstly, hedge fund redemptions have led to funds shorting bitcoin futures to neutralize their price exposure while they wait for their capital to return. Secondly, two separate institutional trades involve 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. Lastly, the growing trend of bitcoin miners pivoting to artificial intelligence has led to funds buying these stocks while simultaneously shorting bitcoin futures to remove crypto correlation from the trade. According to Thielen, these trades are risk management strategies rather than outright bearish plays in bitcoin futures.