Bitcoin has seen a significant 14% increase this month, marking its best monthly performance in a year, with many anticipating the price to soon exceed $80,000, a level not seen since January. However, the perpetual futures market, typically aligned with spot price movements, is exhibiting a contrary behavior, with a funding rate currently below zero. This divergence has sparked a search for explanations among market participants. Many interpret this as a sign that traders lack confidence in bitcoin's recent performance and are positioning for a decline.
Nonetheless, according to Markus Thielen, Founder of 10x Research, who predicted a rally to $125,000 in early 2023, the situation is driven by hedging activities from institutions. The negative funding rate represents a structural shift in the market due to the increased participation of sophisticated players, rather than retail traders calling the shots.
The funding rate is crucial as it acts as a real-time gauge of market sentiment. In perpetual futures, which are contracts tracking bitcoin's price without expiring, exchanges charge a periodic fee to keep futures prices aligned with spot prices.
When futures prices exceed spot prices, indicating aggressive buying in the futures market, longs pay shorts, and the funding rate is positive. Conversely, when futures trade below spot, signaling short pressure dragging futures down relative to actual bitcoin, shorts pay longs, and the rate becomes negative. Over the past few weeks, funding rates have been consistently negative, with shorts in control and perpetual futures trading at a discount to the spot price.
Bitcoin's 30-day average funding rate stands at negative 5%, compared to the historical norm of positive 8%, according to 10x Research, marking a 13 percentage point discount to the baseline and becoming increasingly negative as the price climbs. Thielen noted, 'The Bitcoin funding rate is sending an unusual signal. At minus 5% on a 30-day average against a historical norm of plus 8%, and turning more negative even as Bitcoin rallies 15% and the options skew recovers, something structural is happening in the futures market, not a sentiment shift.' Thielen identified three sources of short pressure in the futures market. The first stems from hedge fund redemptions, where crypto hedge funds have underperformed bitcoin by 140% over five years, leading investors to pull their money out.
During redemption notice periods, funds short bitcoin futures to neutralize price exposure, which are mechanical risk-management trades rather than bearish bets. The second involves two institutional trades requiring the shorting of bitcoin futures as a hedge. One trade bets on Strategy (MSTR) shares outperforming bitcoin directly while shorting futures, and the other aims to capture the 11% yield on MSTR preferred shares while shorting futures to remove crypto price volatility risk. The third trend is bitcoin miners pivoting to artificial intelligence, with miners like Hut 8 reducing bitcoin production and increasing support for AI computing.
Funds buying these stocks simultaneously short bitcoin futures to eliminate crypto correlation from the trade, which is risk management rather than an outright bearish play in bitcoin futures.