The bitcoin price has seen a significant 14% increase this month, marking its best performance in a year. As a result, many anticipate the price will soon break through the $80,000 barrier, a level not seen since January. However, the perpetual futures market, typically aligned with spot price movements, is currently exhibiting bearish tendencies.
Specifically, the funding rate, which indicates market sentiment, is below zero. This divergence has sparked debate among market participants, with some interpreting it as a lack of confidence in bitcoin's recent gains and a potential downturn. Nevertheless, according to 10x Research's Founder, Markus Thielen, this negative funding rate is actually driven by hedging activities from institutional investors, reflecting a structural shift in the market due to increased participation from sophisticated players.
The funding rate is a crucial metric, as it represents the fee exchanged between long and short positions in perpetual futures contracts to keep prices aligned with spot prices. When futures prices exceed spot prices, longs pay shorts, resulting in a positive funding rate. Conversely, when futures trade below spot, shorts pay longs, and the rate becomes negative. In recent weeks, funding rates have been consistently negative, indicating that shorts are dominating the market and 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 average of positive 8%, according to 10x Research. This 13 percentage point discount to the baseline is becoming increasingly negative, even as the price rises.
Thielen suggests that this unusual signal is not 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 separate institutional trades involve shorting bitcoin futures as a hedge: one betting on the outperformance of Strategy shares relative to bitcoin and the other capturing the yield on MSTR preferred shares while removing crypto price volatility risk. Lastly, the growing trend of bitcoin miners pivoting to artificial intelligence has led to funds buying these stocks while simultaneously shorting bitcoin futures to eliminate crypto correlation from the trade. These activities are driven by risk management rather than outright bearish bets on bitcoin futures.