Funding rate arbitrage

When BTC funding rates are persistently positive, shorts receive payments from longs at each funding interval. In the US, that's every 8 hours. In the EU and other regions, it's every hour. If you hold long spot and short perps simultaneously, your directional risk is zero and the funding payment is your P&L.

That is funding rate arbitrage. It's not risk-free, the three main risks are rate flip (the rate turns negative and you start paying instead of collecting), basis risk (spot and perp prices diverge), and execution costs (fees can exceed funding at low rates). Here is exactly how each of those works.

For the mechanics of how funding rates work and what drives them, read our funding rates explained guide.

Funding rate arbitrage is a delta-neutral strategy where you simultaneously hold an equal and opposite position in spot and perpetual futures to collect the funding rate while removing directional price exposure. It's also known as a cash-and-carry trade in traditional finance.

The strategy is distinct from hedging a spot position (covered in hedging a spot portfolio with perps) in one important way. When hedging, you already own spot and open a short perp to protect it from downside. The spot position predates the hedge. Whereas when running funding rate arbitrage, you open both legs simultaneously, specifically to collect the funding. Neither position existed before. The mechanics are identical, but the intent and context are different.

Step 1: Identify a persistently high positive funding rate on a perp. For example: BTC-PERP at +0.05% per 8-hour US interval, or the equivalent elevated rate on an hourly basis for EU and ROW perpetuals.

Step 2: Buy the equivalent notional in spot. For example: 1 BTC at $60,000 = $60,000 long spot. Notional is the total dollar value of a position, not the cash you put up to open it. If you're long 1 BTC at $60,000, your notional is $60,000, even if you only posted a fraction of that as margin. In a delta-neutral setup, matching notional on both sides is what cancels out price exposure: $60,000 of spot offsets $60,000 of short perp, regardless of leverage.

Step 3: Open a short BTC-PERP of equal notional. For example: 1 BTC-PERP short at $60,000.

Step 4: Net delta is now approximately zero. If BTC rises, the spot gains and the short perp loses by roughly the same amount. If BTC falls, the reverse applies.

Step 5: At each funding interval, the short perp collects the funding payment from longs. In the US this occurs every 8 hours; in the EU and other regions it's every hour.

Worked example:

• Funding rate: +0.05% per 8-hour/1-hour period = 0.15% per day
• Notional: $60,000
• Daily funding collected: $60,000 x 0.15% = $90
• After 30 days at the same rate: approximately $2,700 gross before costs

The annualized equivalent of a 0.15%/day rate is approximately 55%. This is an illustrative annualization of one specific rate at one point in time. Funding rates change at each settlement interval. In the US, that's every 8 hours. In the EU and other regions, it's every hour. A rate that is +0.05% at one interval can be -0.01% at the next. Lead the decision with the daily dollar figure relative to your costs, not the annualized number.

The mechanics of funding rate arbitrage and hedging a spot portfolio are the same: long spot plus short perp. What differs is context and intent.

Hedging is used when you already own spot and want to reduce downside exposure over a specific period. The spot position predates the decision to hedge. Funding rate arbitrage is entered when you identify a rate differential worth collecting and both legs are opened fresh for this purpose.

One sentence summary: hedging protects an existing position. Funding rate arbitrage creates a new position to collect a rate differential.

For the full mechanics and worked examples of the hedging approach, see our guide to hedging a spot portfolio with perps.

Funding rates change every 8 hours in the US and every hour in the EU and other regions. A rate that is +0.05% per US interval today (or the EU and other non-US geos equivalent) can flip negative tomorrow. If the rate turns negative, the short perp now pays funding rather than collecting it.

The strategy reverses from profitable to costly. Rate trends can shift quickly during directional market moves or changes in leverage across the market. In order to mitigate risk, monitor rate trends actively and don't assume an elevated rate will persist.

Spot price and perp price are not always identical. The difference between them is called the basis. If the perp trades at a discount to spot when you close the position, the short perp gain is less than the spot cost, and the hedge underperforms.

Basis can widen during periods of high volatility or forced selling, which are often the same periods when you want to close the trade. For a full treatment of the spot-futures spread, see basis trading.

Opening both a spot purchase and a short perp position involves trading fees on both legs. The margin for the short perp has an opportunity cost. At low funding rates, these costs can exceed the funding collected. The strategy only makes financial sense when the funding rate is significantly and persistently above your all-in cost threshold.

The strategy is most viable when three conditions hold:

1. The funding rate has been consistently above your all-in cost threshold for multiple days, not just a single elevated reading.
2. The basis between spot and perp is stable and not widening unexpectedly.
3. You can hold the position long enough for funding collected to exceed trading fees and opportunity cost.

Break-even example: If round-trip trading fees are 0.04% of notional ($24 on $60,000), you need daily funding above $24 to profit. At 0.05% per 8-hour period ($90/day on $60,000), the strategy covers costs and generates approximately $66/day net. At 0.01% per 8-hour period ($18/day), it doesn't cover costs.

These figures use the US 8-hour settlement model. For the EU and other non-US geos, the equivalent daily rate is reached at proportionally lower per-hour rates, and the dollar outcomes per day on equivalent rates are the same.

It's important to know that the strategy is least viable when the funding rate is near zero or has been volatile in recent days, when the market is strongly directional (basis can move sharply in trending markets), or when the cost of execution is a significant fraction of the expected funding.

For how to read funding rate signals and assess whether a rate is likely to persist, see funding rates as a strategy signal.

Perpetual futures, also known as "perps", are derivative contracts that allow you to speculate on the price movement of assets such as BTC, SOL and ETH, without needing to own the actual cryptocurrencies.

The educational material on this page is for information only and does not constitute an offer to trade futures. Kraken Futures is provided by a different licensed Kraken entity depending on where you live. Derivatives are complex instruments that carry a high risk of rapid losses due to leverage. You should not risk money you cannot afford to lose. Tax treatment depends on your individual circumstances and may change. Geographic restrictions may apply and can change without notice. Kraken products and services may not be covered by investor-compensation or deposit-protection schemes. Nothing on this page is investment, legal or tax advice. Access is subject to eligibility, local regulation and the Terms of Service for the legal entity you face.