Crypto Perpetual Funding Arbitrage with Spot Hedges
Summary
The document explains how perpetual futures funding payments help keep contract prices near spot prices, then describes a market-neutral carry trade: short a perpetual contract and buy the same asset in spot to collect positive funding. It outlines screening assets by historical and current funding, opening matched exposure, and using staggered orders to reduce market impact. The author suggests diversifying across many coins and closing positions when funding becomes sufficiently negative or a coin's price movement raises contract risk.
The article estimates returns from unusually high funding during a 2021 bull market and says those rates are unlikely to persist. It also discusses changing premiums, liquidation risk from leverage, and the possibility that a prolonged bear market lowers returns and increases negative funding. The return and low-drawdown claims are the author's estimates, not independently demonstrated results; fees, basis changes, execution, and funding variability can materially affect outcomes.
Key ideas
- A spot long paired with a perpetual short can reduce directional price exposure while earning positive funding.
- Funding rates vary over time, and unusually high bull-market rates may not persist.
- Diversification can reduce the impact of a sharp negative funding payment on one asset.
- Leverage increases liquidation risk even when spot holdings offset much of the price exposure.
- Staggered orders can help reduce market impact when opening or closing positions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.