What is Funding?
Funding (funding fee or funding rate) is a commission charged on perpetual futures on centralized exchanges. The main purpose of funding is to maintain a minimum difference between the spot and perpetual futures. Funding commission is periodically paid to traders with a long or short position. You can capitalize on this mechanism by arbitraging the funding rate (Funding Rate Arbitrage).
Earning on Funding Arbitrage (or Funding Arbitrage) is a strategy in which traders use the difference between the Funding Commissions on open-ended futures and the real (spot) price of the asset. The essence of the strategy is to open simultaneously long and short positions on different platforms or between futures and spot. In this case, the main income comes from the positive funding commission paid to the trader. Here's how it works:
1. How do you make money on funding arbitrage?
- Opening a position:
- You buy a token on a spot exchange (e.g., bitcoin).
- At the same time, you open a short position on perpetual futures on the same token.
- Earning a funding fee (funding rate):
- If the funding rate is positive, you will receive a payout for the short position.
- If the funding rate is negative (with the minus sign), you will receive a payout for the long position.
- Holding the position:
- While the funding rate is positive, you are holding the position and receiving payouts every 4 or 8 hours (1 hour for DEX futures).
- Closing the position:
When the funding becomes unprofitable, you close both of the positions.
You can find further thorough guides in free educational materials for our service clients.
2. Successful funding arbitrage conditions
You need a few points to make funding arbitrage successful:
- High funding rate:The larger the spread of funding in your arbitrage position, the bigger the profit.
- High demand for long positions:The greater the demand for long positions, the longer the funding rate stays positive. The same is true with short positions and negative funding.
- Consider the fees:The fees might have a big impact on your profit. The lower the commission, the higher the earnings.
- Consider the price spread on futures arbitrage:
The ideal situation is when you have the spread between the price of buying and selling, while still obtaining the funding fee. We monitor and show all of those situations; in the “Arbitrage Perpetuals” tab, you can see all of those situations available on the market and swiftly evaluate price spread and funding fees.
3. Funding arbitrage risks
Funding arbitrage carries some risks that you should consider:
- Decrease in funding fees:
The funding fee gradually changes, often leaning towards 0.01%. Note that the funding rate could change over time in a different direction, causing you to start paying the funding fee. - Token price volatility:
During increased volatility, funding could drastically change, leading to order liquidation. - Closing the deal:
You might have difficulties when closing the deal. To close the deal correctly, you must wait for the price spread to equalize to avoid incurring losses on futures arbitrage.
The best way to avoid this is to set up notifications in a perpetual screener so that you receive alerts when the conditions for closing the deal are met.
How does the funding rate work?
The funding fee is calculated and deposited at a specific time, usually every 8 hours. During high volatility or prolonged price decoupling, the funding deposit time could change to 4 or 1 hour.
Funding is a mechanism for balancing the price between spot and futures exchanges for one token. Here’s how it works:
- When thefunding rate is positive(perpetual futures price is higher than the spot price), long position holders pay short position holders.
- When thefunding rate is negative(perpetual futures price is lower than the spot price), short position holders pay long position holders.