Arbitrage Crypto Funding Rates

Frequently asked questions

What is CryptoFundingTracker?

Crypto Funding Tracker allows you to monitor and identify potential funding rate arbitrage opportunities across several cryptocurrency exchanges. This tool can be used to develop both simple and complex trading strategies. The most obvious trading strategy is Delta Neutral funding arbitrage. However, there are several other strategies which may benefit from this information. These include funding optimization for directional trading, cash/carry trading, and crypto currency market-making.

What are Funding Rates and Perpetual Futures in Cryptocurrency Markets?

Funding rates are an integral mechanic built into perpetual futures. Perpetual futures are the most popular type of derivative in the cryptocurrency markets. Perpetual futures are contracts with no expiry date, which aim to track the price of a specific cryptocurrency pair. One example is BTC/USDT PERP, which should represent the price of BTC in USD. Because these derivatives have no expiry date, there is no settlement.

The obvious follow-up question is, how does a derivative with no settlement track the price of an asset? This is the job of funding rate, which is paid at regular intervals between long and shorts. If the funding rate is positive, the longs will pay the shorts. If the funding rate is negative, the shorts will pay the longs. Funding rates usually follow market sentiment. In bull markets, you will usually see positive funding rates, while in bear markets, you will tend to see mostly negative funding rates.

These funding rates essentially force the price of the perpetual future to match the target asset. This is because the funding rate will vary depending on the difference in price between the Perpetual Future (Derivative) and its target asset. When the perp goes below the asset price, the funding rate will become negative. This means the longs are being paid by the shorts. When the perp goes above the target asset price, the shorts are paid by the longs.

How Can We Use Funding Rates to Make Money?

Funding Rates are fairly reliable and consistent over short-medium periods. We can use tools like CryptoFundingTracker.com to check the averages of funding rates through extended periods, to identify consistency. Consistency is important when arbitraging funding rates. Most strategies look for reliability. Put another way, CFT allows you to find funding rates with low volatility, which are most useful for semi-passive trading strategies like funding rate arbitrage.

Once we have found a perpetual future with a consistent funding rate, we can then look for ways to extrapolate that funding rate, while neutralizing "delta" on the target asset. In other words, we can capture the funding rate while removing our exposure to price movements in the crypto asset. This is called delta neutral funding rate arbitrage.

Funding rates can often reach levels of 50%+ APR in either direction, through extended periods of time, so these strategies can be incredibly profitable compared to traditional investments.

What are the Risks with Funding Rate Arbitrage?

Funding rate arbitrage is considered a moderate to complex trading strategy. It is certainly more complex than buying BTC on spot markets and waiting for the price to move. By design, delta neutral arbitrage will involve leverage on at least one side of the trade. This is because the only way to be delta neutral is by shorting an asset, and by design shorting requires leverage.

Any short can theoretically lose infinite amounts of money. There is no theoretical cap on the price of an asset. Of course, in reality, no asset will increase infinitely in price. Regardless, we are discussing cryptocurrency, and cryptocurrency markets are famous for their large price swings and volatility. You will need to monitor any position with leverage, to ensure you are protected from liquidation. If you are not comfortable using leverage, it is best to experiment with small amounts to get a feel for how the exchanges and platforms work, before deploying any significant amounts of capital.

The other risks are mostly counterparty risk, which is quite significant in crypto currency. Counterparty risk is very difficult to quantify, but crypto platforms are more vulnerable to counterparty risk than traditional financial platforms. That is because cryptocurrency is prone to hacks, theft, exploits, and other "Black Swan" events which result in permanent loss for the platforms themselves. Further, the assets are are using as collateral and in our trading pairs, such as stablecoins, can theoretically also suffer similar exploits. It is advisable to consider counterparty risk in your trading, but how you do that is up to you.

Ultimately, cryptocurrency trading of any kind carries significant risk. This strategy is more risky than basic cryptocurrency trading for the reasons described above, and its general complexity. You are responsible for your own safety in the crypto markets, and many experienced people have lost significant sums of money from exploits, hacks, leverage, and many other reasons. We advise you only trade with money you are comfortable with losing. Further, this is purely informational, and nothing on this website constitutes financial advice.

Describe the Different Tools on CryptoFundingTracker.com

There are a few different tools on this website, all of which can provide unique insights into your funding rate focused trading strategies. The first tool, which is available to all users and guests, is the rates tool. This tool by default compares funding rates across all supported platforms in order to identify the largest discrepancies in funding rates for the same trading pairs. CFT currently supports the following exchanges: Binance, OKEx, Kucoin and ByBit.

The arbitrage tool compares rates between the above exchanges. You can sort these by period length to identify the most consistent differences in funding rates, which should be the most likely to provide reliable returns in the future. We also offer a Single Side Funding Rate tool, which sorts all funding rates on the above platforms, highest to lowest. This can be sorted according to periods as well.

Beyond the Rates tool, we also offer the ability to track your Funding Rate Earnings and your Open Positions. These tools require you to sign in / sign up to the website, and input your READ-ONLY API Keys on the desired platforms. A read-only API key allows our tool to view your positions, but does not allow us to execute any actions on your account. Please be very careful to use a read-only API Key. These tend to be the default option, but it's important to double check.

Describe Some Other Trading Methods that Can Benefit from this Tool

As mentioned above in this FAQ, there are trading methods beyond delta neutral funding rate arbitrage which can benefit from CryptoFundingTracker. Anyone who is trading perpetual futures on crypto markets should aim to optimize their funding rate strategy. Our tool lets you identify the best exchange to hold your position, so that you'll pay the least amount in funding fees, or even make money on funding. It's important to realize that funding rates can have a huge impact on trading performance, even though they are often overlooked.

We'd also recommend this tool to market makers or other high volume traders. Once again, funding rates are such an important mechanic on Perpetual Futures. Any trading strategy which does not consider the impact of funding rates is incomplete.

Beyond the Rates tool, we also offer the ability to track your Funding Rate Earnings and your Open Positions. These tools require you to sign in / sign up to the website, and input your READ-ONLY API Keys on the desired platforms. A read-only API key allows our tool to view your positions, but does not allow us to execute any actions on your account. Please be very careful to use a read-only API Key. These tend to be the default option, but it's important to double check.

How Much Money can you Make With Delta Neutral Arbitrage?

The amount of money you will make from delta neutral funding rate arbitrage will depend on your capital investment. The performance is best expressed in an APR (Annual Percentage Return). Performance will also depend on the risk of your strategy. There are some very basic FR arbitrage strategies which may earn a modest 15-20% APR. If you go further down the risk curve, trading lower liquidity cryptos and using more obscure platforms, returns can hit triple digit APR's. Your results may vary, and it's important to experiment with platforms and strategies to find something which resonates with you.

We hope you enjoy our tool, and we are always looking for your feedback. Please check our Discord if you have any questions.