Bitcoin has risen 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.
Yet the perpetual futures market, which is typically synchronized with spot price movements, behaves as if the opposite were true. Specifically, the funding rate – a positive number when futures are positioned for an increase in Bitcoin price and negative when positioned for a decline – is currently below zero.
This has left market participants searching for an explanation. Although many view this divergence as a signal that traders lack confidence in Bitcoin’s recent performance and are positioned for a decline, it is not the only explanation.
According to Markus Thielen, founder of 10x Research, who predicted a rise to $125,000 in early 2023, the situation is actually driven by institutions’ hedging activities. Rather than being driven by retail traders, the negative funding rate represents a structural change in the market brought about by the increasing participation of sophisticated players.
Why the financing rate is important
Perpetual futures are contracts that track the price of bitcoin without ever expiring, unlike standard futures contracts listed on an exchange like the CME. To keep futures prices linked 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, investors who own the futures contracts pay short sellers (those who sold contracts they did not own in the hopes of being able to buy them back at a lower price). In this case, the financing rate is positive.
When futures are trading below the spot price, it is a sign that short pressure is pulling the futures down relative to real bitcoin, shorts are paying out longs, and the rate is going negative.
The funding rate mechanism acts as a real-time indicator of market sentiment.
In recent weeks, funding rates have been consistently negative, meaning shorts are in the lead and perpetual futures are trading at a discount to the spot price.
Bitcoin’s average 30-day funding rate is minus 5%, compared to the historical norm of 8%, according to 10x Research. This is a 13 percentage point reduction from the baseline, and it becomes increasingly negative even as the price climbs.
“Bitcoin’s funding rate sends an unusual signal,” Thielen wrote in a note to clients on Saturday. “At minus 5% on a 30-day average versus a historical norm of plus 8%, and becoming more negative even if Bitcoin rebounds 15% and options bias recovers, something structural is happening in the futures market, not a change in sentiment.”
Structural pressures
Thielen identified three sources of short-term pressure in the futures market.
The first concerns hedge fund redemptions. Crypto hedge funds underperformed bitcoin by 140% over five years and investors withdrew money. This takes time, and during redemption notice periods, funds have short-sold Bitcoin futures to neutralize their price exposure while waiting 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 cash company, are being bet on to directly outperform Bitcoin while shorting futures contracts. The other aims to capture the 11% yield on MSTR Preferred Stock (STRC) while shorting the futures contracts to eliminate the risk of cryptocurrency price volatility. Strategy raised $3.5 billion in April alone, raising both deals simultaneously.
The third is the growing trend of Bitcoin miners turning to artificial intelligence. Miners like Hut 8, up 48% since April 6, are reducing their bitcoin production and increasing their support for AI computing. Funds that buy these stocks simultaneously sell Bitcoin futures to remove crypto correlation from trading. Again, this is risk management and not a purely bearish play on Bitcoin futures.
