The bitcoin price has seen a significant surge of about 14% this month, marking its best performance in a year, with expectations that it may soon break the $80,000 threshold, a level not seen since January. However, the perpetual futures market, typically aligned with spot price movements, is exhibiting a bearish stance, as indicated by a funding rate below zero.
This divergence has prompted market participants to seek explanations. While many view this disparity as a sign of lack of confidence in bitcoin's recent performance, 10x Research's Founder, Markus Thielen, suggests that the situation is driven by hedging activities from institutions.
The negative funding rate, according to Thielen, represents a structural shift in the market due to the increasing participation of sophisticated players, rather than a bearish outlook. The funding rate is a critical metric, as it reflects the periodic fee exchanges charge to keep futures prices aligned with spot prices.
When futures prices exceed spot prices, indicating aggressive buying in the futures market, longs pay shorts, resulting in a positive funding rate. Conversely, when futures trade below spot prices, signaling short pressure, 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 consistently been 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 despite the price increase.
Thielen identified 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, with funds buying these stocks simultaneously shorting bitcoin futures to remove crypto correlation from the trade. These are risk management strategies rather than outright bearish plays in bitcoin futures.