Bitcoin has seen a 14% increase this month, marking its best performance in a year, with predictions that it may soon exceed $80,000. However, the perpetual futures market is behaving differently, with a funding rate below zero, indicating a potential drop. 10x Research's Markus Thielen suggests that this divergence is due to hedging activity by institutions, rather than a lack of confidence in bitcoin's performance. The negative funding rate represents a structural shift in the market, driven by the increasing participation of sophisticated players.
Perpetual futures contracts track bitcoin's price without expiring and are kept in line with spot prices through a periodic fee, the funding rate. When futures prices are higher than spot prices, longs pay shorts, resulting in a positive funding rate. Conversely, when futures trade below spot prices, shorts pay longs, and the rate becomes negative. The funding-rate mechanism acts as a real-time gauge of market sentiment.
Recently, funding rates have been consistently negative, indicating that shorts are driving the futures market. Bitcoin's 30-day average funding rate is negative 5%, compared to the historical norm of positive 8%, according to 10x Research. Thielen attributes this to three sources of short pressure in the futures market: hedge fund redemptions, institutional trades, and bitcoin miners pivoting to artificial intelligence.
These factors are driving the negative funding rate, which is a structural change in the market rather than a sentiment shift. Thielen identified hedge fund redemptions as a key factor, as crypto hedge funds have underperformed bitcoin by 140% over five years, leading to investor withdrawals. During redemption notice periods, funds have been shorting bitcoin futures to neutralize their price exposure. Additionally, two separate institutional trades involve shorting bitcoin futures as a hedge, one betting that shares of Strategy will outperform bitcoin, and the other capturing the yield on MSTR preferred shares while shorting futures to remove crypto price volatility risk.
The growing trend of bitcoin miners pivoting to artificial intelligence is also contributing to the negative funding rate, as funds buying these stocks simultaneously short bitcoin futures to remove crypto correlation from the trade. These factors are driving the negative funding rate, which is a risk management strategy rather than an outright bearish play in bitcoin futures.