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Funding arbitrage between spot and futures markets and inter-exchange funding arbitrage

Arbitrage is one of the most popular earning strategies in the cryptocurrency market. In this article, we will analyze two types of arbitrage: funding arbitrage between the spot and futures markets, as well as inter-exchange funding rate arbitrage. You will learn how these strategies work, how to minimize risks, and what examples of successful trades you can adopt.

What is funding?

Funding (Funding Rate) is a periodic rate paid between traders in the perpetual futures market. It helps synchronize the futures price with the spot market price:

  • If the rate is positive, long traders pay short traders.
  • If the rate is negative, short traders pay long traders.
"Funding allows you to profit from the difference between markets, especially when funding rates fluctuate significantly."

An example of a funding rate for the ARK coin on the Bybit exchange. Here we see a negative rate of -2%, with funding credit/debit occurring in 2 hours and 27 minutes. Funding credit and debit are reflected in the realized profit of the open position.

1. Funding arbitrage between spot and futures

Strategy essence

This strategy involves simultaneously opening opposite positions in the spot market and the perpetual futures market. For example:

  • You buy an asset in the spot market (long).
  • You open a short on perpetual futures for the same asset.

Thus, you fully hedge the asset's price movement but earn on the funding rate paid in the futures market.

Trade example

  • The current funding rate for a specific pair is 2% every 8 hours.
  • You buy this coin in the spot market for $1,000.
  • You open a short on futures with a volume of $1,000, possibly using leverage, which would require less of your funds.
  • Every 8 hours, you receive 2% of $1,000 = $20 as a funding rate payment.

Result: Price movement does not affect your profit since the positions are hedged, and your income is $60 per day.

With a negative funding rate, you can short in the spot market and open a long in the futures market. Read: How to open a short on the spot market using borrowed coins from the exchange?

Risks

  • Fees: Ensure that the fees for opening and holding positions do not exceed the funding income.
  • Price difference: If the spot and futures market prices diverge significantly, it may affect the cost of closing positions.
  • Funding rate reduction: The rate may decrease, reducing your profit.

2. Inter-exchange funding rate arbitrage

Strategy essence

Inter-exchange funding rate arbitrage involves using the difference in funding rates between two exchanges. For example, one exchange may offer a positive rate, while another offers a negative rate.

How does it work?

  • On Exchange A: funding rate +2.0% (longs pay shorts).
  • On Exchange B: funding rate -0.1% (shorts pay longs).
  • You open a short on Exchange A and a long on Exchange B.

Trade example

  • Exchange A pays you +2% every 8 hours for holding a short.
  • Exchange B charges -0.1% every 8 hours for holding a long.
  • Net profit: 2% - 0.1% = 1.9% every 8 hours.

Result: If you trade with a volume of $10,000, your profit will be $190 every 8 hours or $570 per day.

To operate with larger amounts, you can use leverage. With 1:10 leverage, you will need $1,000 of your own funds to operate with $10,000. Do not forget about the risks of leveraged trading.

Risks

  • Rate changes: The rate difference may disappear, making the strategy unprofitable.
  • Fees: Consider trading and deposit/withdrawal fees.
  • Counterparty risks: Ensure both exchanges are reliable and have high liquidity.

The role of our service in funding arbitrage

The Cryptata service provides tools for inter-exchange funding arbitrage and single-exchange funding arbitrage between spot and futures markets.

1. Finding arbitrage opportunities

The service automatically analyzes funding rates across different exchanges and instruments, offering profitable arbitrage opportunities.

2. Notifications

You can set up notifications to receive information about profitable opportunities in real time.

3. Telegram bot

Receive data on arbitrage opportunities via a Telegram bot to avoid missing profitable deals.

Conclusion

Funding arbitrage between spot and futures markets, as well as inter-exchange funding rate arbitrage, are effective strategies for earning in the cryptocurrency market. They allow you to profit regardless of price direction but require careful planning, analysis, and risk management. By following the described strategies and tips, you can consistently earn from these opportunities.