The bitcoin price has seen a significant increase of approximately 14% this month, marking its best performance in a year, with many anticipating it will soon exceed $80,000, a level not seen since January. However, the perpetual futures market, typically aligned with spot price movements, is displaying a contrasting behavior.
Specifically, the funding rate, which is positive when futures prices are expected to rise and negative when expected to fall, is currently below zero, sparking speculation among market participants. Many interpret this divergence as a lack of confidence in bitcoin's recent performance, with traders positioned for a potential drop.
Yet, according to Markus Thielen, Founder of 10x Research, who predicted a bitcoin rally to $125,000 in early 2023, the situation is driven by hedging activities from institutions, representing a structural shift in the market due to the increasing participation of sophisticated players. The funding rate is crucial as it reflects the periodic fee exchanges charge to keep futures prices aligned with spot prices in perpetual futures contracts. When futures prices exceed spot prices, indicating aggressive buying, longs pay shorts, and the funding rate is positive. Conversely, when futures trade below spot, signaling short pressure, shorts pay longs, and the rate turns negative.
This mechanism serves as a real-time gauge of market sentiment. Recently, funding rates have been consistently negative, with shorts dominating and perpetual futures 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, indicating a 13 percentage point discount to baseline and becoming increasingly negative as the price rises. Thielen notes, 'The Bitcoin funding rate is sending an unusual signal.
At minus 5% on a 30-day average against a historical norm of plus 8%, and turning more negative even as Bitcoin rallies 15% and the options skew recovers, something structural is happening in the futures market, not a sentiment shift.' Thielen identifies three sources of short pressure in the futures market. Firstly, hedge fund redemptions, where crypto hedge funds, having underperformed bitcoin by 140% over five years, lead to investors pulling money out, and during redemption notice periods, funds short bitcoin futures to neutralize price exposure. Secondly, two institutional trades involve shorting bitcoin futures as a hedge: one bets on Strategy (MSTR) shares outperforming bitcoin directly, and the other aims to capture the 11% yield on MSTR preferred shares while hedging against crypto price volatility. Lastly, the growing trend of bitcoin miners pivoting to artificial intelligence, such as Hut 8, leads to funds buying these stocks while shorting bitcoin futures to remove crypto correlation, which is a risk management strategy rather than a bearish play in bitcoin futures.