The bitcoin price has experienced a significant surge of approximately 14% this month, marking its best monthly performance in a year. As a result, there is a growing consensus that the price may soon exceed $80,000, a level that has not been seen since January. However, the perpetual futures market, which typically mirrors spot price movements, is currently exhibiting a divergent behavior.
Specifically, the funding rate, an indicator that is positive when futures are positioned for a price increase and negative when positioned for a drop, is currently below zero. This discrepancy has led market participants to seek an explanation. While many view the divergence as a sign that traders lack confidence in bitcoin's recent performance and are positioned for a decline, 10x Research's Founder Markus Thielen offers an alternative explanation. According to Thielen, the negative funding rate is driven by hedging activities from institutions rather than a lack of confidence in bitcoin's performance.
Instead of retail traders driving the market, 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 metric in the perpetual futures market, as it acts 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 spot prices. Bitcoin's 30-day average funding rate 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 (MSTR) will outperform bitcoin directly while shorting futures, while the other aims to capture the 11% yield on MSTR preferred shares (STRC) while shorting futures to remove 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. In each of these cases, the shorting of bitcoin futures is a risk management strategy rather than an outright bearish play.