The bitcoin price has surged approximately 14% this month, marking its best monthly performance in a year, with predictions that it 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 contrary to this trend. 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 divergence has led to speculation among market participants. While many interpret this as a sign that traders lack confidence in bitcoin's recent performance and are preparing for a drop, 10x Research's Founder Markus Thielen offers an alternative explanation.
According to Thielen, the negative funding rate is driven by hedging activity from institutions, representing a structural change in the market due to the increasing participation of sophisticated players. Perpetual futures contracts track bitcoin's price without expiring and are kept in line with spot prices through a periodic fee known as the funding rate. 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 prices, it signals that short pressure is driving futures down relative to actual bitcoin prices, and shorts pay longs, resulting in a negative funding rate. The funding rate serves as a real-time gauge of market sentiment. Recently, funding rates have been consistently negative, indicating that shorts are dominating and perpetual futures are trading at a discount to spot prices. Bitcoin's 30-day average funding rate is negative 5%, compared to the historical norm of positive 8%, according to 10x Research, representing a 13 percentage point discount to the baseline and becoming increasingly negative as the price climbs.
Thielen notes that the Bitcoin funding rate is sending an unusual signal, with the 30-day average at minus 5% against a historical norm of plus 8%, and turning more negative even as Bitcoin rallies 15% and the options skew recovers, indicating a structural shift in the futures market rather than a sentiment change. 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 and shorting bitcoin futures to remove crypto correlation from their trades. These are mechanical risk-management trades rather than outright bearish bets on bitcoin futures.