The price of Bitcoin has surged by approximately 14% this month, marking its best monthly performance in a year. As a result, there is a growing consensus that the price will soon surpass $80,000, a level not seen since January. However, the perpetual futures market, which typically moves in tandem with spot price action, is behaving as if the opposite is true.
Specifically, the funding rate, a metric that indicates 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 sign that traders lack confidence in Bitcoin's recent performance and are positioned for a drop. However, according to 10x Research's Founder Markus Thielen, the situation is driven by hedging activity from institutions rather than a lack of confidence. The negative funding rate represents a structural change in the market brought on by the increasing participation of sophisticated players.
Perpetual futures are contracts that track Bitcoin's price without expiring, and exchanges charge a periodic fee, the funding rate, to keep futures prices tethered to spot prices. When futures prices are higher than spot prices, longs pay shorts, and the funding rate is positive. Conversely, when futures trade below spot prices, it indicates that short pressure is dragging futures down relative to actual Bitcoin, and the funding rate becomes negative.
The funding-rate mechanism acts as a real-time gauge of market sentiment. In recent weeks, funding rates have been consistently negative, meaning that shorts are in control, and perpetual futures have traded 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 climbs.
Thielen identified three sources of short pressure in the futures market. Firstly, hedge fund redemptions have led to funds shorting Bitcoin futures to neutralize their price exposure while waiting for their capital to return. Secondly, two separate institutional trades require shorting Bitcoin futures as a hedge. One involves betting 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 strip out crypto price volatility risk.
Lastly, the growing trend of Bitcoin miners pivoting to artificial intelligence has led to funds buying these stocks while simultaneously shorting Bitcoin futures to remove crypto correlation from the trade. These are risk-management strategies rather than outright bearish plays in Bitcoin futures.