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 may soon exceed $80,000, a level not seen since January. However, the perpetual futures market, which typically moves in tandem with spot price action, is currently behaving in a contradictory manner.
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. While some interpret the negative funding rate 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 situation is driven by hedging activity from institutions, representing a structural shift in the market due to the increasing participation of sophisticated players. The funding rate is a crucial metric, as it reflects the periodic fee exchanges charge to keep futures prices aligned with spot prices.
When futures prices exceed spot prices, longs pay shorts, resulting in a positive funding rate. Conversely, when futures trade below spot, shorts pay longs, and the rate becomes negative.
The funding-rate mechanism serves as a real-time gauge of market sentiment. Recently, funding rates have been consistently negative, indicating that shorts are dominating the market and perpetual futures are trading at a discount to spot prices. The 30-day average funding rate for bitcoin is currently 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 despite the rising price. Thielen attributes the short pressure in the futures market to three primary sources.
Firstly, hedge fund redemptions have led to funds shorting bitcoin futures to neutralize their price exposure during redemption notice periods. Secondly, two separate institutional trades involve shorting bitcoin futures as a hedge. One trade bets on the outperformance of Strategy shares relative to bitcoin, while the other aims to capture the 11% 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 factors contribute to the negative funding rate, which Thielen believes is a structural shift rather than a sentiment-driven bearish play.