The bitcoin price has surged roughly 14% this month, marking its best monthly performance in a year, with many expecting it to soon break the $80,000 barrier, a level not seen since January. However, the perpetual futures market, which typically mirrors spot price movements, is behaving contrarily. The funding rate, which indicates market sentiment and is positive when futures are positioned for a price increase and negative when positioned for a drop, is currently below zero.
This divergence has sparked a search for explanations, with many interpreting it as a lack of confidence in bitcoin's recent performance and a signal that traders are positioned for a drop. According to Markus Thielen, Founder of 10x Research, the situation is driven by hedging activity from institutions rather than a broad bearish sentiment.
Thielen, who predicted a rally to $125,000 in early 2023, believes the negative funding rate represents a structural shift in the market due to the increasing participation of sophisticated players. The funding rate is a crucial mechanism that keeps futures prices tied to spot prices by charging a periodic fee. When futures prices exceed spot prices, indicating aggressive buying in the futures market, longs pay shorts, resulting in a positive funding rate.
Conversely, when futures trade below spot, signaling short pressure, shorts pay longs, and the rate becomes negative. This mechanism serves as a real-time gauge of market sentiment. Recently, funding rates have been consistently negative, indicating that shorts are dominating and perpetual futures are trading at a discount to 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 as the price rises. Thielen attributes the short pressure in the futures market to three primary sources. First, hedge fund redemptions have led to funds shorting bitcoin futures to neutralize their price exposure during redemption notice periods. Second, two institutional trades involve shorting bitcoin futures as a hedge: one bets on the outperformance of Strategy shares over bitcoin, while the other aims to capture the yield on MSTR preferred shares.
Lastly, the growing trend of bitcoin miners pivoting to artificial intelligence has led to funds buying these stocks while shorting bitcoin futures to remove crypto correlation from the trade. These are mechanical risk-management trades rather than outright bearish bets in bitcoin futures.