The price of bitcoin has surged by approximately 14% this month, marking its best monthly performance in the past year. As a result, there is a growing consensus that the price may soon exceed $80,000, a level not seen since January. However, the perpetual futures market, which typically mirrors the spot price action, is exhibiting a contradictory behavior.
The funding rate, which is a measure of whether futures are positioned for a price increase or decrease, is 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 and a potential drop in price.
Nevertheless, Markus Thielen, the founder of 10x Research, attributes this situation to hedging activity by institutions rather than a bearish sentiment. According to Thielen, 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 mechanism that keeps futures prices tied to spot prices. 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 serves as a real-time gauge of market sentiment. In recent weeks, funding rates have consistently been negative, indicating that shorts are dominating the market and perpetual futures are trading at a discount to the spot price.
The 30-day average funding rate for bitcoin is negative 5%, compared to the historical norm of positive 8%, according to 10x Research. This represents a 13 percentage point discount to the baseline and is becoming increasingly negative even as the price rises. Thielen identified three sources of short pressure in the futures market.
The first is hedge fund redemptions, where funds short bitcoin futures to neutralize their price exposure during redemption notice periods. The second involves two institutional trades that 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 eliminate crypto price volatility risk. The third source is the growing trend of bitcoin miners pivoting to artificial intelligence, where funds buying these stocks simultaneously short bitcoin futures to remove crypto correlation from the trade.
These are risk management strategies rather than outright bearish plays in bitcoin futures.