Why Bitcoin’s Rising Price Isn’t Scaring Off Investors
As the price of bitcoin rises, reaching its best monthly performance in a year with a 14% increase, many are wondering what’s behind the unusual behavior in the futures market. Despite the potential for the price to push past $80,000, the perpetual futures market is showing a negative funding rate, which is typically a sign of a lack of confidence in the market. However, according to analyst Markus Thielen, this divergence is not a bearish signal, but rather a result of hedging activity from institutions.
The funding rate, which is used to keep futures prices in line with spot prices, has been consistently negative in recent weeks, meaning that shorts are in charge and perpetual futures are trading at a discount to spot price. This has led to a 13 percentage point discount to the historical norm, with the 30-day average funding rate at negative 5%. Thielen believes that this is not a sign of a sentiment shift, but rather a structural change in the market driven by the increasing participation of sophisticated players.
Understanding the Funding Rate Mechanism
The funding rate mechanism acts as a real-time gauge of market sentiment, with positive rates indicating that buyers are more aggressive in the futures market and negative rates indicating that shorts are in charge. In the case of bitcoin, the negative funding rate is being driven by hedging activity from institutions, including hedge fund redemptions, institutional trades, and miners pivoting to artificial intelligence.
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Why the funding rate matters
What’s Behind the Short Pressure in the Futures Market
According to Thielen, there are three main sources of short pressure in the futures market. The first is hedge fund redemptions, where funds are shorting bitcoin futures to neutralize their price exposure while they wait for their capital to return. The second involves institutional trades that require shorting bitcoin futures as a hedge, including bets on Strategy (MSTR) and capturing the yield on MSTR preferred shares (STRC). The third is the growing trend of bitcoin miners to pivot to artificial intelligence, where funds are buying stocks and shorting bitcoin futures to remove crypto correlation from the trade.
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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.
