The bitcoin price has seen a significant surge of approximately 14% this month, marking its best monthly performance in a year. Market consensus suggests 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 action, is behaving differently.
The funding rate, which indicates the market's sentiment, is currently below zero, sparking confusion among market participants. Many interpret this divergence as a lack of confidence in bitcoin's recent performance, but 10x Research's founder, Markus Thielen, offers an alternative explanation. According to Thielen, the negative funding rate is driven by hedging activities from institutions, representing a structural shift in the market due to the increasing participation of sophisticated players. The funding rate is a crucial aspect of perpetual futures, as it keeps futures prices tied to spot prices through periodic fees.
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 price. The 30-day average funding rate for bitcoin is negative 5%, compared to the historical norm of positive 8%, according to 10x Research.
Thielen identifies three sources of short pressure in the futures market: hedge fund redemptions, institutional trades involving shorting bitcoin futures as a hedge, and the growing trend of bitcoin miners pivoting to artificial intelligence. These factors contribute to the negative funding rate, which is a result of risk management rather than a bearish sentiment towards bitcoin.