The bitcoin price has seen a significant increase of roughly 14% this month, marking its best performance in a year. As a result, there is a growing consensus that the price could soon exceed $80,000, a level that has not been seen since January. However, the perpetual futures market is not reflecting this optimism, with funding rates currently below zero. This divergence has led to speculation among market participants.
While some view this as a sign of a lack of confidence in bitcoin's recent performance, 10x Research's Founder Markus Thielen suggests that the negative funding rate is actually driven by hedging activities from institutions. According to Thielen, the increasing participation of sophisticated players in the market has led to a structural change, resulting in the negative funding rate. Perpetual futures contracts are designed to track the price of bitcoin without expiring, and to maintain a connection between futures and spot prices, exchanges charge a periodic fee known as the funding rate.
When the futures price exceeds the spot price, longs pay shorts, and the funding rate is positive. Conversely, when futures trade below spot, shorts pay longs, and the rate becomes negative. The funding rate serves as a real-time indicator of market sentiment. In recent weeks, funding rates have consistently been negative, indicating that shorts are dominating the market and futures are trading at a discount to spot prices.
The 30-day average funding rate for bitcoin is currently negative 5%, compared to a historical average of positive 8%, according to 10x Research. This represents a 13 percentage point discount to the baseline and is becoming increasingly negative despite the rising price.
Thielen believes that this unusual signal is not a reflection of a sentiment shift but rather a structural change in the futures market. He identifies 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. Hedge funds have underperformed bitcoin by 140% over five years, leading to investor withdrawals.
During the redemption notice periods, funds short bitcoin futures to neutralize their price exposure. Additionally, two separate institutional trades involve shorting bitcoin futures as a hedge.
The first trade bets on the outperformance of Strategy shares over bitcoin, while the second aims to capture the 11% yield on MSTR preferred shares. The third source of short pressure is the growing trend of bitcoin miners reducing their bitcoin production and investing in AI computing. Funds buying these stocks simultaneously short bitcoin futures to remove crypto correlation from the trade.
According to Thielen, these are risk-management strategies rather than outright bearish plays in bitcoin futures.