Bitcoin (BTC) rose approximately 14% this month, posting its best monthly performance in nearly a year, with market sentiment widely expecting its price to soon break above $80,000—a level not seen since January.
However, the perpetual futures market, which typically moves in sync with spot prices, has behaved oppositely. Specifically, the funding rate—which is positive when traders bet on Bitcoin’s price rising and negative when betting on a decline—is currently below zero.
This has led market participants to seek explanations. While many interpret this divergence as a signal that traders lack confidence in Bitcoin’s recent performance and anticipate a decline, this is not the only possible interpretation.
According to Markus Thielen, founder of 10x Research, who predicted the stock price would rise to $125,000 was actually driven by institutional hedging activity as early as the beginning of 2023. Negative financing rates are no longer dominated by retail traders but reflect a structural market shift brought about by increasingly sophisticated participants.
Why is the funding rate so important?
Perpetual futures contracts track the price of Bitcoin and never expire, unlike standard futures listed on exchanges such as the Chicago Mercantile Exchange (CME). To keep the futures price aligned with the spot price, exchanges periodically charge a fee known as the funding rate.
When the futures price is higher than the spot price, it indicates that buyers in the futures market are more aggressive; longs (investors holding futures contracts) pay fees to shorts (investors who sell contracts they do not own, expecting to buy them back later at a lower price). In this case, the funding rate is positive.
When the futures price is below the spot price, it indicates that short selling pressure is dragging the futures price down relative to the actual price of Bitcoin, with shorts paying longs, resulting in a negative interest rate.
The funding rate mechanism serves as a real-time indicator of market sentiment.
Over the past few weeks, funding rates have remained negative, indicating that short positions dominate and perpetual futures are trading below the spot price.
According to 10x Research, Bitcoin's 30-day average funding rate is -5%, compared to a historical average of +8%. This is 13 percentage points below the benchmark, and the funding rate continues to decline even as prices rise.
“Bitcoin funding rates have sent an unusual signal,” Tiren wrote in a report to clients on Saturday. “The 30-day average is -5%, compared to a historical norm of +8%; even as Bitcoin rose 15% and options skew rebounded, funding rates continued to decline, suggesting structural changes are occurring in the futures market rather than a shift in market sentiment.”
Structural stress
Tiren pointed out three sources of short-selling pressure in the futures market.
First, hedge fund redemptions. Over the past five years, cryptocurrency hedge funds have underperformed Bitcoin by 140%, prompting investors to withdraw their capital. This process takes time; during the redemption notice period, funds short Bitcoin futures to hedge price risk while waiting for funds to return to bank or trading accounts. Thielen says these are mechanical risk management trades, not shorting.
The second transaction involves two separate institutional trades, both requiring shorting Bitcoin futures as a hedge. One bet targets a decline in the stock price of MicroStrategy (MSTR), the largest publicly traded Bitcoin futures company. Bitcoin vault companies, while shorting futures, will directly outperform Bitcoin. Another strategy aims to... achieve an 11% yield by shorting MSTR preferred shares (STRC) while simultaneously shorting futures to hedge against cryptocurrency price volatility. In April alone, this strategy raised $3.5 billion, driving simultaneous growth in both trades.
The third point is the growing trend of bitcoin miners transitioning toward artificial intelligence. Miners like Hut 8, whose stock has risen 48% since April 6, are reducing bitcoin production and increasing support for AI computing. Funds buying these stocks are also shorting bitcoin futures to hedge against correlation in cryptocurrency trading. Again, this is a risk management strategy, not a complete shorting of bitcoin futures.