The bitcoin price has seen a significant surge of approximately 14% this month, marking its best monthly performance in over a year. As a result, many are predicting that the price will soon surpass $80,000, a level not seen since January.
However, the perpetual futures market, which typically mirrors spot price action, is behaving differently. Specifically, the funding rate, which is typically positive when futures are positioned for a price increase and negative when positioned for a drop, is currently below zero. This divergence has left many market participants searching for an explanation. While some view the negative funding rate as a sign of lack of confidence in bitcoin's recent performance, 10x Research's Founder Markus Thielen attributes it to hedging activity by institutions.
According to Thielen, the negative funding rate represents a structural change in the market, driven by the increasing participation of sophisticated players. The funding rate is a crucial mechanism that keeps futures prices tied to spot prices.
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.
In recent weeks, funding rates have been consistently negative, indicating that shorts are in control, and perpetual futures have traded at a discount to spot price. Thielen notes that the 30-day average funding rate is negative 5%, compared to the historical norm of positive 8%. This 13 percentage point discount to baseline is getting more negative, even as the price climbs. 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. 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.
The first bets that shares of Strategy, the largest publicly traded bitcoin treasury company, will outperform bitcoin directly, while the second aims to capture the 11% yield on MSTR preferred shares. Furthermore, bitcoin miners like Hut 8 are reducing their bitcoin production and adding support for AI computing. Funds buying these stocks are simultaneously shorting bitcoin futures to remove crypto correlation from the trade. These trades are risk management strategies, rather than outright bearish plays in bitcoin futures.