The bitcoin price has experienced a significant surge of approximately 14% this month, marking its best monthly performance in a year. Many expect the price to soon exceed $80,000, a level not seen since January. However, the perpetual futures market, which typically aligns with spot price action, is exhibiting a different trend.
Specifically, the funding rate, which is positive when futures are positioned for a price increase and negative when positioned for a drop, is currently below zero. This divergence has left market participants searching for an explanation. While some interpret this as a lack of confidence in bitcoin's recent performance, 10x Research's Founder, Markus Thielen, suggests that the situation is driven by hedging activity from institutions. According to Thielen, the negative funding rate represents a structural change in the market, resulting from the increasing participation of sophisticated players.
The funding rate is a crucial mechanism that keeps futures prices aligned with spot prices. When futures prices are higher than spot prices, longs pay shorts, and the rate is positive.
Conversely, when futures trade below spot prices, shorts pay longs, and the rate becomes negative. Recently, funding rates have been consistently negative, indicating that shorts are in control, and perpetual futures have traded at a discount to spot prices. The 30-day average funding rate for bitcoin is negative 5%, compared to the historical norm of positive 8%, according to 10x Research. Thielen identified three sources of short pressure in the futures market: hedge fund redemptions, institutional trades, and the growing trend of bitcoin miners pivoting to artificial intelligence.
These factors contribute to the shorting of bitcoin futures as a risk-management strategy, rather than a bearish bet on the cryptocurrency. As the price of bitcoin continues to climb, the funding rate is becoming increasingly negative, suggesting a structural shift in the market rather than a sentiment shift.