Perptual Futures and funding rate: Opportunities and Challenges for Investors

1. Basic Concepts of Perpetual Futures and Funding Rate

1.1 Characteristics of Perptual Futures

Perptual Futures is a special derivative in the cryptocurrency market, which has the following characteristics:

• No delivery date, allowing for long-term holdings
• Maintain consistency with spot prices through the funding rate mechanism
• Adopts a dual price mechanism: Marked price and real-time transaction price

1.2 funding rate mechanism

The funding rate is a key mechanism for adjusting the long and short forces in Perptual Futures.

• Composed of the premium part and the fixed part
• When the funding rate is positive, longs pay shorts.
• When the funding rate is negative, shorts pay longs.
• Usually settled every 8 hours

1.3 A simple understanding of the funding rate

The funding rate mechanism can be likened to the supply and demand adjustment in the rental market:

• When there are too many tenants (longs), additional fees must be paid to the landlord (shorts).
• When there are too many landlords (shorts), they need to pay subsidies to tenants (longs).

Essentially, the funding rate is the dynamic balance adjustment mechanism of the market.

2. funding rate arbitrage strategy

2.1 Arbitrage Principle

The core of funding rate arbitrage is:

• Hedge spot and contract positions
• Lock funding rate earnings
• Avoid price volatility risk

2.2 Three Arbitrage Methods

1. Single Coin Single Exchange Arbitrage

   • Determine the direction of the rate
   • Establish a reverse position
   • Collect funding rate

2. Single-currency cross-exchange arbitrage

   • Choose exchanges with large rate differences
   • Establish reverse positions on different exchanges
   • Earn the rate difference

3. Multi-Currency Arbitrage

   • Choose highly relevant cryptocurrencies
   • Establish positions using the funding rate differentiation
   • Earn funding rate difference and volatility returns

The difficulty of these strategies increases sequentially, and the technical and execution requirements also become higher.

3. Analysis of Institutional Advantages

3.1 Opportunity Identification Ability

Institutions monitor the entire market in real time through advanced algorithms, capable of identifying arbitrage opportunities in milliseconds. In contrast, retail investors' ability to identify opportunities is greatly limited.

3.2 execution efficiency

Institutions have high-frequency trading systems, customized APIs, and premium channels, allowing them to execute trades quickly at a very low cost. Retail investors find it difficult to compete with this level of execution efficiency.

3.3 Risk Control

Institutions have a complete risk control system that can monitor risks in real time and respond quickly. Retail investors often lack systematic and timely risk management.

4. Future Prospects of Arbitrage Strategies

4.1 Institutional Strategy Differences

Although the arbitrage strategies among institutions are largely similar, each has its unique advantages:

• Focus on major coins and dig deep for opportunities.
• Some excel in small-cap coins, focusing on rotation.

4.2 Market Capacity

The current estimated arbitrage capacity of the cryptocurrency market exceeds 10 billion, but this number will change dynamically with market developments.

4.3 Investor Suitability

• Arbitrage strategies are suitable for conservative investors.
• Has low volatility and low drawdown characteristics
• The yield limit is not as good as the trend strategy.
• It is difficult for retail investors to participate directly, so consider participating indirectly through institutional products.

For ordinary investors, while funding rate arbitrage is a type of "certain return", it is recommended to choose transparent and compliant institutional arbitrage products as a stable component of asset allocation due to disadvantages in technology, cost, and risk control.