The bitcoin price has experienced a significant surge of approximately 14% this month, marking its best monthly performance in a year. As a result, there is a growing consensus that the price may soon exceed $80,000, a level not seen since January. However, the perpetual futures market is behaving contradictorily, with funding rates currently below zero. This divergence has led market participants to seek explanations.
While some interpret this as a lack of confidence in bitcoin's recent performance, 10x Research's Founder Markus Thielen offers an alternative perspective. According to Thielen, the negative funding rate is driven by hedging activity from institutions, representing a structural shift in the market.
This change is attributed to the increasing participation of sophisticated players, rather than a bearish play by retail traders. The funding rate is a crucial mechanism that keeps futures 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. The funding-rate mechanism serves as a real-time gauge of market sentiment.
Recently, funding rates have been consistently negative, indicating that shorts are dominating the market, and perpetual futures are trading at a discount to spot price. The 30-day average funding rate for bitcoin is currently negative 5%, compared to the historical norm of positive 8%.
This 13 percentage point discount to baseline is becoming increasingly negative, even as the price climbs. Thielen 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 trade bets on the outperformance of Strategy shares relative to bitcoin, while the other aims to capture the 11% yield on MSTR preferred shares. Lastly, the growing trend of bitcoin miners pivoting to artificial intelligence has resulted in funds buying these stocks while shorting bitcoin futures to remove crypto correlation from the trade.
These activities are driven by risk management rather than outright bearish plays in bitcoin futures.