The bitcoin price has seen a significant surge of roughly 14% this month, marking its best monthly performance in a year. As a result, there is a growing consensus that the price could soon exceed $80,000, a level not seen since January. However, the perpetual futures market, which typically mirrors spot price movements, is currently behaving in a contradictory manner.
The funding rate, an indicator of market sentiment that is positive when futures prices are expected to rise and negative when they are expected to fall, is currently below zero. This divergence has prompted market participants to seek an explanation. While some interpret this as a sign of traders' lack of confidence in bitcoin's recent performance, 10x Research's Founder Markus Thielen offers an alternative perspective.
According to Thielen, the negative funding rate is driven by hedging activities from institutions, representing a structural shift in the market due to increased participation from sophisticated players. The funding rate is a critical mechanism that keeps futures prices aligned with spot prices. It involves periodic fees charged by exchanges, which can be either positive or negative depending on whether futures prices are higher or lower than spot prices.
When futures prices exceed spot prices, indicating aggressive buying in the futures market, long investors pay shorts, resulting in a positive funding rate. Conversely, when futures prices are lower than spot prices, signaling short pressure, shorts pay longs, and the funding rate becomes negative. This mechanism serves as a real-time gauge of market sentiment. Recently, funding rates have consistently been 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 notes that the negative funding rate is not a reflection of a sentiment shift but rather a structural change in the futures market.
He identifies three primary sources of short pressure in the futures market. Firstly, hedge fund redemptions have led to funds shorting bitcoin futures to neutralize their price exposure during redemption notice periods.
Secondly, two institutional trades involve shorting bitcoin futures as a hedge: one bets on the outperformance of Strategy shares relative to bitcoin, while the other aims to capture the 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 activities are risk management strategies rather than outright bearish plays in bitcoin futures.