The price of bitcoin has seen a significant increase of approximately 14% this month, marking its best performance in a year, with predictions suggesting it may soon exceed $80,000, a level not seen since January. However, the perpetual futures market, typically aligned with spot price movements, is currently behaving in a contradictory manner. The funding rate, which is positive when futures prices are expected to rise and negative when expected to drop, is presently 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 and their positioning for a potential drop, 10x Research's Founder Markus Thielen offers an alternative perspective. According to Thielen, who correctly predicted a rally to $125,000 in early 2023, the situation is driven by hedging activities from institutions rather than a general bearish outlook. The negative funding rate represents a structural shift in the market, brought about by the increasing participation of sophisticated players.
To understand the significance of the funding rate, it's essential to consider the nature of perpetual futures. These contracts track bitcoin's price without expiring and are kept in line with spot prices through periodic fees.
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 trade below spot prices, suggesting short pressure is dragging futures down relative to actual bitcoin prices, 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 and perpetual futures are trading at a discount to spot prices. 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 despite the rising price. Thielen noted in a client note, 'The Bitcoin funding rate is sending an unusual signal. At minus 5% on a 30-day average against a historical norm of plus 8%, and turning more negative even as Bitcoin rallies 15% and the options skew recovers, something structural is happening in the futures market, not a sentiment shift.' Thielen identified three sources of short pressure in the futures market. The first stems from hedge fund redemptions, where crypto hedge funds, having underperformed bitcoin by 140% over five years, face investor withdrawals.
During the redemption notice periods, these funds short bitcoin futures to neutralize their price exposure, which are mechanical risk-management trades rather than bearish bets. The second involves two institutional trades that require shorting bitcoin futures as a hedge. One trade bets on the outperformance of Strategy's (MSTR) shares over bitcoin, while the other aims to capture the 11% yield on MSTR's preferred shares (STRC), both of which involve shorting futures to eliminate crypto price volatility risk.
Strategy raised $3.5 billion in April alone, scaling both trades simultaneously. The third factor is the growing trend of bitcoin miners pivoting to artificial intelligence, with miners like Hut 8 reducing their bitcoin production and increasing their support for AI computing. Funds investing in 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.