The idea
Perpetual futures never expire. To keep their price close to the spot price, longs and shorts pay each other a funding rate, usually every eight hours. When most traders are long and bullish, funding is positive and longs pay shorts.
The arbitrage buys the coin on the spot market and shorts the same amount of perpetuals. Whatever price does, one side gains what the other loses, and the short side collects funding. It is the crypto version of the cash and carry trade.
Watch it play out
Step by step
The rules
Setup
- Funding on the perpetual has been positive and steady.
- Enough capital on the exchange to hold both sides without liquidation risk.
Entry
- Buy the coin on spot and short the same amount of the perpetual at the same time.
Stop-loss
- Close both sides if funding turns negative for a sustained period.
Target
- Collect funding for as long as it stays positive; close both legs together.
Filters that help
- Use little or no leverage on the short, so a sharp rally cannot liquidate it.
- Spread capital across reliable venues: exchange failure is the biggest risk.
Why it can work
Crypto markets have often had more leveraged buyers than sellers, which has kept funding positive for long stretches. The hedged position earns that imbalance without betting on direction.
Because the position is hedged, its result depends on the funding paid, fees and the exchange, not on whether the coin goes up or down.
Worked example
You buy 1 BTC and short 1 BTC of perpetuals. Over ten days price swings by thousands of dollars, but the two legs offset. Funding averages 0.01% every eight hours, so the short collects about 0.3% in ten days, roughly 11% a year at that pace, before fees.
If funding turns negative, the short starts paying instead, and the trade should be closed.
When it works, when it fails
Works best
In bullish, crowded markets where funding stays positive for weeks.
Struggles
When funding turns negative, when fees and spreads eat the small daily income, or when an exchange fails or freezes withdrawals. A sharp rally can also liquidate a leveraged short before you can add margin.
Common mistakes
- Using high leverage on the short to boost returns.
- Keeping everything on one exchange.
- Treating it as safe: the price risk is hedged, the other risks are not.
Variations
- Cross-exchange funding
- Shorting the perpetual on the exchange paying the highest funding and holding spot elsewhere, which earns more but adds transfer and venue risk.
- Dated futures basis
- Buying spot and selling a quarterly future at a premium, locking in the gap until expiry.
What the evidence says
Evidence: Popular, untestedWidely used, but no rigorous public testing. An idea to test yourself.
Positive funding in crypto perpetuals has been common in bull markets, and the cash and carry trade is widely used by funds. We know of no rigorous public study of its net returns across venues and conditions, and the income has shrunk as more capital chases it.
Its risks are exchange failure, negative funding and liquidation, not price direction.
Questions
- How much does funding rate arbitrage earn?
- It depends entirely on the funding rate, which changes constantly. In calm periods it may earn little after fees; in crowded bull markets funding has paid much more, for a while.
- What happens if funding turns negative?
- Then the short pays the longs, and the trade starts losing money every eight hours. Most traders close both legs when funding turns negative for more than a short spell.
- What is a funding rate?
- A periodic payment between longs and shorts on perpetual futures that keeps the perpetual's price near spot. Positive funding means longs pay shorts.
- Is funding rate arbitrage safe?
- No. The price risk is hedged, but negative funding, fees, liquidation of the short in a fast rally and exchange failure all remain.
- How often is funding paid?
- Commonly every eight hours, though some exchanges and markets use other intervals.