bitcoin is up about 14% this month, its best monthly performance in a year, and the consensus is that the price could soon surpass $80,000, a level not seen since January.
However, the perpetual futures market, which is normally synchronized with spot price action, behaves as if it were the complete opposite. Specifically, the funding rate (a figure that is positive when futures are positioned for a rise in the price of bitcoin and negative when they are positioned for a fall) is currently below zero.
This has left market participants searching for an explanation. While many interpret the divergence as a sign that traders lack confidence in bitcoin’s recent performance and are positioned for a decline, that is not the only explanation.
According to 10x Research founder Markus Thielen, who predicted a rally to $125,000 in early 2023, the situation is, in fact, being driven by hedging activity by institutions. Rather than retailers making the decisions, the negative funding rate represents a structural change in the market brought about by the increasing involvement of sophisticated players.
Why the financing rate is important
Perpetual futures are contracts that track the price of bitcoin without expiring, unlike standard futures that trade on an exchange like the CME. To keep futures prices tied to spot prices, exchanges charge a periodic fee, the funding rate.
When futures prices are higher than spot prices, meaning buyers are more aggressive in the futures market, long-term investors (who own the futures) pay those who sell contracts they did not own with the expectation of being able to buy them back at a lower price. In that case, the financing rate is positive.
When futures trade below the spot price, it is a sign that short pressure is dragging futures down relative to actual bitcoin, shorts pay off longs, and the rate turns negative.
The funding rate mechanism acts as a real-time indicator of market sentiment.
In recent weeks, funding rates have been consistently negative, meaning short positions are being held and perpetual futures have been trading at a discount to the spot price.
Bitcoin’s average 30-day funding rate is negative 5%, compared to the historical norm of positive 8%, according to 10x Research. This is a 13 percentage point discount from the initial value, and is becoming more negative even as the price rises.
“Bitcoin’s funding rate is sending an unusual signal,” Thielen wrote in a note to clients on Saturday. “With -5% on a 30-day average versus a historical norm of plus 8%, and turning more negative even as Bitcoin rises 15% and the options bias recovers, something structural is happening in the futures market, not a change in sentiment.”
Structural pressures
Thielen identified three sources of short pressure in the futures market.
The first is hedge fund redemptions. Crypto hedge funds have underperformed bitcoin by 140% in five years, and investors have been withdrawing money. 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. Shares of Strategy (MSTR), the largest publicly traded bitcoin treasury company, are being bet that they will directly outperform bitcoin while being shorted in futures. The other aims to capture the 11% return on MSTR Preferred Stock (STRC) while also shorting futures to eliminate the risk of cryptocurrency price volatility. Strategy raised $3.5 billion in April alone, scaling both operations simultaneously.
The third is the growing trend of bitcoin miners turning to artificial intelligence. Miners like Hut 8, which are up 48% since April 6, are reducing their bitcoin production and increasing their support for AI computing. The funds buying these stocks are simultaneously shorting bitcoin futures to remove crypto correlation from the trade. Again, this is risk management, not an overtly bearish play on bitcoin futures.
