$BB How It Works: Funding Rate Arbitrage
A Simple Guide to a Core BTC Yield Strategy $BB
One of the main ways @BounceBit generates safe, market-neutral yield on Bitcoin is a strategy called "funding rate arbitrage." It sounds complex, but the concept is simple. Let's break it down.
Step 1: The Setup
In crypto, there are two main ways to buy Bitcoin: you can buy the actual "spot" BTC, or you can buy a "perpetual future," which is a contract that tracks its price. Often, the price of the future is slightly different from the spot price.
Step 2: The Funding Rate
To keep the two prices close together, exchanges use a mechanism called the "funding rate." When lots of people are buying futures (going long), they have to pay a small fee to the people who are selling futures (going short). This payment happens automatically, usually every 8 hours. Historically, this funding rate has averaged between 5% and 20% APY.
Step 3: The Arbitrage
The BounceBit strategy is to be on both sides at the same time. They will buy $10,000 of actual spot $BTC . Simultaneously, they will sell (go short) $10,000 of the BTC perpetual future.
Because they are both long and short, the price movement of Bitcoin doesn't matter. If BTC goes up or down, what they lose on one side, they gain on the other. Their position is "market-neutral."
However, because they are short the future, they get paid the funding rate fee every 8 hours. They have isolated and captured this payment, risk-free. This is just one of the strategies used to manage a portfolio of over $500 million in BTC for users.