coindesk.com
Bitcoin has rallied roughly 14% this month, its best monthly performance in a year, and the consensus is that the price could soon push past $80,000, a level not seen since January.
Yet the perpetual futures market, which is typically in sync with spot price action, is behaving as if the opposite is true. Specifically, the funding rate — a figure that's positive when the futures are positioned for a bitcoin price increase and negative when positioned for a drop — is currently below zero.
That has left market participants searching for an explanation. While many read the divergence as a signal that traders lack confidence in bitcoin's recent performance and are positioned for a drop, that's not the only explanation.
According to 10x Research's Founder Markus Thielen, who predicted a rally to $125,000 way back in early 2023, the situation is, in fact, being driven by hedging activity from institutions. Instead of the shots being called by retail traders, the negative funding rate represents a structural change in the market brought on by the increasing participation of sophisticated players.
Why the funding rate matters
Perpetual futures are contracts that track bitcoin's price without ever expiring, unlike standard futures listed on an exchange like the CME. To keep futures prices tethered to spot prices, exchanges charge a periodic fee, the funding rate.
When the futures prices are higher than spot, meaning buyers are more aggressive in the futures market, longs (investors who own the futures) pay shorts (who've sold contracts they didn't own in expectation they will be able to buy them back at a lower price). In that case, the funding rate is positive.
When futures trade below spot, it's a sign short pressure is dragging futures down relative to actual bitcoin, shorts pay longs and the rate goes negative.
The funding-rate mechanism acts as a real-time gauge of market sentiment.
In recent weeks, funding rates have been consistently negative, meaning the shorts are in charge and perpetual futures have traded at a discount to spot price.
Bitcoin's 30-day average funding rate is negative 5%, compared with the historical norm of positive 8%, according to 10x Research. That is a 13 percentage point discount to baseline, and it is getting more negative even as the price climbs.
"The Bitcoin funding rate is sending an unusual signal," Thielen wrote in a note to clients on Saturday. "At minus 5% on a 30-day average against a historical norm of plus 8%, and turning more negative even as Bitcoin rallies 15% and the options skew recovers, something structural is happening in the futures market, not a sentiment shift."
Structural pressures
Thielen identified three sources for the short pressure in the futures market.
The first is hedge fund redemptions. Crypto hedge funds have underperformed bitcoin by 140% over five years, and investors have been pulling money out. That takes time, and during redemption notice periods, funds have been shorting bitcoin futures to neutralize their price exposure while they wait for their capital to return to their bank or trading accounts. These are mechanical risk-management trades, not bearish bets, Thielen said.
The second involves two separate institutional trades, both of which require shorting bitcoin futures as a hedge. One bets that shares of Strategy (MSTR), the largest publicly traded bitcoin treasury company, will outperform bitcoin directly while shorting futures. The other is aimed at capturing the 11% yield on MSTR preferred shares (STRC) while shorting futures to strip out crypto price volatility risk. Strategy raised $3.5 billion in April alone, scaling both trades simultaneously.
The third is the growing trend of bitcoin miners to pivot to artificial intelligence. Miners like Hut 8, up 48% since April 6, are reducing their bitcoin production and adding to their support for AI computing. Funds buying these stocks are simultaneously shorting bitcoin futures to remove crypto correlation from the trade. Again, this is risk management, not an outright bearish play in bitcoin futures.