The bitcoin price has seen a significant surge of approximately 14% this month, marking its best monthly performance in the past year. There is a general consensus that the price may soon exceed $80,000, a level not seen since January. However, the perpetual futures market, which typically aligns with spot price movements, is exhibiting a divergent behavior. Specifically, the funding rate, which 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 interpret this divergence as a lack of confidence in bitcoin's recent performance, indicating a potential drop, 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 bearish play by retail traders. This represents a structural shift in the market due to the increasing participation of sophisticated players.
The funding rate is crucial as it acts as a real-time gauge of market sentiment. In the case of perpetual futures, which are contracts that track bitcoin's price without expiring, exchanges charge a periodic fee to keep futures prices aligned with 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, shorts pay longs, and the rate becomes negative. Recently, funding rates have been consistently negative, indicating that shorts are dominant and perpetual futures are trading at a discount to spot price. The 30-day average funding rate for bitcoin 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 as the price rises.
Thielen identifies three primary sources for the short pressure in the futures market. The first source is hedge fund redemptions, where crypto hedge funds have underperformed bitcoin and investors are withdrawing their money. During the redemption notice periods, funds short bitcoin futures to neutralize their price exposure, which are mechanical risk-management trades rather than bearish bets. The second involves institutional trades that require shorting bitcoin futures as a hedge.
One trade bets on the outperformance of Strategy shares over bitcoin, while the other aims to capture the yield on MSTR preferred shares by shorting futures to eliminate crypto price volatility risk. The third source is the growing trend of bitcoin miners pivoting to artificial intelligence, where miners reduce their bitcoin production and add support for AI computing. Funds buying these stocks simultaneously short bitcoin futures to remove crypto correlation from the trade, which is a risk management strategy rather than an outright bearish play in bitcoin futures.