Occasionally, some coins on the exchange will have high funding rates, such as -3%. If you open a 2x contract, you can get a 6% fee income every time the funding fee is settled (usually 8 hours), and you can earn 30% by opening a 10x contract. For different exchanges, such as OKX and Binance, there will be different funding rates, so we can use the funding rate to do arbitrage. Detailed method:
What is Funding Rate?
Funding rate is the fee that traders need to pay or receive during the period of holding a leveraged contract position. Its size depends on the difference between the contract price and the market price of the underlying asset and the direction of the position held by the trader (long or short). Funding rate is usually settled at certain time intervals (such as every hour).
Specifically, if the contract price is higher than the underlying asset market price (the funding rate is positive), traders holding long positions need to pay traders holding short positions to keep market participants balanced. Conversely, if the contract price is lower than the market price (the funding rate is negative), traders holding short positions need to pay traders holding long positions.
When is the funding rate charged?
Generally speaking, it is charged every 8 hours, at 24:00, 8:00 and 16:00 Beijing time.
How to charge funding rate
The exchange will deduct or add funding fees from the trader's account when the position is held. Funding fees are usually deducted or added from the margin of the position, so it directly affects the trader's account balance. The fees that should be charged or received are calculated based on your position. It is important to receive funding fees even if you open a position at the last second before it is charged.
How to use funding rate arbitrage
1. Hedging across different exchanges
The funding rates of different exchanges may vary greatly. For example, LPT is -2.5% on Binance and -3% on OKX. In this way, we can open a long position on OKX and use the same position to open a short position on Binance for hedging. In this way, we can achieve risk-free arbitrage without liquidation under the premise of low leverage. At settlement, the funding fee earned is 0.5%, and a 10x contract is a 5% profit. The greater the difference in funding rates between exchanges, the higher the profit.
2. Spot contract hedging
For example: Generally speaking, the interest rate of loans is lower than the funding rate. When the funding rate is negative, shorting the spot currency and opening a long position of the same position in the contract can achieve position hedging, and at the time of settlement, you can earn the funding fee of the long contract without risk.
The same applies when the funding fee is positive.
Note: All cryptocurrencies are subject to violent fluctuations or even the possibility of completely zeroing out. The currencies mentioned above do not constitute investment advice, DYOR.