The bitcoin price has seen a significant surge of approximately 14% this month, marking its best monthly performance in the past year. Despite this, the perpetual futures market is exhibiting a seemingly contradictory behavior, with funding rates currently below zero. This divergence has sparked a search for explanations among market participants, with many interpreting it as a lack of confidence in bitcoin's recent performance.
However, according to Markus Thielen, Founder of 10x Research, the negative funding rate can be attributed to hedging activities by institutions rather than a bearish sentiment. Thielen, who predicted a rally to $125,000 in early 2023, suggests that the increasing participation of sophisticated players in the market is driving this trend. The funding rate, which is a periodic fee charged by exchanges to keep futures prices aligned with spot prices, acts as a real-time gauge of market sentiment.
In recent weeks, funding rates have consistently been negative, indicating that shorts are dominating the market and perpetual futures are trading at a discount to spot price. Bitcoin's 30-day average funding rate is currently negative 5%, compared to the historical norm of positive 8%, representing a 13 percentage point discount to baseline. 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 structural changes in the market rather than a sentiment shift.
As the price of bitcoin continues to climb, the funding rate is becoming increasingly negative, suggesting that the market is experiencing a structural shift rather than a bearish sentiment.