The price of bitcoin has seen a significant increase of around 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, which typically mirrors spot price movements, is currently behaving in a manner that suggests the opposite.
Specifically, the funding rate, which is positive when futures are positioned for a price increase and negative when positioned for a drop, is currently below zero. This divergence has left market participants seeking an explanation. While many view this as a sign of a lack of confidence in bitcoin's recent performance, 10x Research's Founder, Markus Thielen, suggests that the situation is driven by hedging activity from institutions.
According to Thielen, the negative funding rate represents a structural shift in the market due to the increasing participation of sophisticated players, rather than a bearish play by retail traders. The funding rate is a crucial metric, as it reflects the difference between futures and spot prices. When futures prices are higher than spot prices, buyers are more aggressive in the futures market, and longs pay shorts, resulting in a positive funding rate. Conversely, when futures trade below spot prices, 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 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. Thielen identifies three sources of short pressure in the futures market: hedge fund redemptions, institutional trades, and the growing trend of bitcoin miners pivoting to artificial intelligence. Hedge funds have underperformed bitcoin by 140% over five years, leading to investor redemptions, which take time, and during this period, funds have been shorting bitcoin futures to neutralize their price exposure.
Two separate institutional trades also require shorting bitcoin futures as a hedge: one betting that shares of Strategy, the largest publicly traded bitcoin treasury company, will outperform bitcoin directly, and the other aimed at capturing the 11% yield on MSTR preferred shares while shorting futures to strip out crypto price volatility risk. Additionally, bitcoin miners like Hut 8 are reducing their bitcoin production and adding support for AI computing, with funds buying these stocks simultaneously shorting bitcoin futures to remove crypto correlation from the trade. These are risk management strategies, not outright bearish plays in bitcoin futures.