Today I will share a risk-free money-making secret with you. You heard it right! As long as you are not greedy, it is risk-free! Here’s the answer: it’s funding rate hedging arbitrage.

For example, a few days ago, friends who know how to play the LOOM/USDT perpetual contract should have made some profit from it. Although this trading pair can no longer be arbitraged now, there will definitely be similar opportunities in the future, so hurry up and learn.

1️⃣ What is the funding rate?

In a CEX, the same cryptocurrency can have both spot and contract trading, and due to differing trading volumes, the same cryptocurrency may have different prices, often leading to premiums. At this time, the emergence of funding rates is to correct the price difference between spot and contract, making the side with the premium pay the other side.

Generally, it works like this:

- When the contract price is higher than the spot price, the funding rate is positive, and the long side has to pay the short side.

- When the contract price is lower than the spot price, the funding rate is negative, and the short sellers have to pay the long buyers.

The funding fee paid by one side to the other in a long/short position = Total contract position x Funding rate.

Funding rates are generally calculated every 8 hours, specifically at 8 AM, 4 PM, and midnight. Sometimes, adjustments are made due to special circumstances, such as when Binance's BNX had a situation where funding rates were collected every 2 hours. If there is no serious premium situation, the default funding rate is 0.01%. Please see the figure below; the box in the upper right corner shows the funding rate and the countdown to its next settlement.

2️⃣ What is the principle of risk-free profit?

Taking the LOOM token as an example, on October 17, the spot price of LOOM on Binance was around 0.37 USD, and the contract was around 0.359 USD. There were too many short sellers, and the price difference between spot and contract was 0.1 USD, which is a very high difference. Moreover, Binance, being the largest exchange, has particularly high trading volume. To correct this price difference, Binance had to raise the funding rate for LOOM to the maximum of -3% and change the settlement time from every 8 hours to every 4 hours, forcing short sellers to pay more to stop them from shorting. At the same time, there were also LOOM/USDT contracts on other exchanges, but due to less depth than Binance, their funding rates only settled every 8 hours. Thus, the arbitrage opportunity arose: we can go long on Binance before 4 AM, 12 PM, and 8 PM each day while shorting elsewhere, accurately capturing the 3% funding rate before closing positions on both platforms to achieve risk-free arbitrage.

So the money you earn comes from the short sellers who are willing to take the risk to continue shorting and pay you.

3️⃣ Operational methods

1. Divide the funds you use for arbitrage into two parts.

2. When the LOOM/USDT contract still maintains a high funding rate, before 4 AM, 12 PM, and 8 PM each day, use half of the funds to open a long position on Binance at LOOM/USDT and the other half to open a short position elsewhere at LOOM/USDT at a 1x leverage. It doesn’t matter if they open at different prices, but they must be opened together in a short time.

Note: You can open positions 10-20 minutes before settlement to avoid significant price fluctuations during settlement that could cause losses.

3. After hedging, wait for the settlement at the hour mark; the 3% funding fee is safely yours, how delightful.

4. After settlement, first observe the price and trading volume. Once the price stabilizes, close the contracts on both platforms simultaneously in a short time.

Thus, one round of funding rate hedging arbitrage is complete. After one operation, excluding the wear and tear on the price band of the contract at closing and transaction fees, the profit should be around 2.5-2.9%. If the high funding rate remains consistent, then arbitrage can be done three times a day, yielding a daily profit of 7.5-8.7%, which is quite substantial. Once again, it is emphasized that the arbitrage situation occurs when the LOOM/USDT contract still maintains a high funding rate, and operations should be conducted before 4 AM, 12 PM, and 8 PM each day.

4️⃣ Is there really no risk at all?

As mentioned before, if you are not greedy, there is none.

Potential risks are:

1. The exchange running away (this is almost impossible).

2. When opening a contract hedge with high leverage, if it coincides with significant price fluctuations or spikes, it could lead to one side being liquidated.

3. Not being skilled enough, making operational mistakes, pressing the wrong button, or not hedging at the same time, etc.

5️⃣ Additional precautions:

1. This is just to teach everyone how to use funding rates for risk-free arbitrage and does not encourage everyone to engage in contract trading. Contracts have risks; please be cautious when entering the market.

2. For those who have not operated before, it is recommended to start with small funds for one or two trials to become familiar, and then increase the amount.

3. Funding rate arbitrage is not limited to the cryptocurrency pairs and exchanges mentioned above; as long as there is a significant (over 1%) rate difference or differing intervals between exchanges, arbitrage can be pursued.

4. Abnormal funding rates will end due to the conclusion of the cryptocurrency market and adjustments to the settlement time by exchanges. Therefore, arbitrage opportunities will only exist in the short term. If you want to rely on this method to make money in the long term, you need to monitor the funding rates of various contracts yourself. This article only provides a method and an idea.

The next big market trend is about to start; are you ready?

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