Funding rates: the secret weapon of delta-neutral traders

The genesis of a trading revolution

Picture this: It's 2016, and a former trader named Arthur Hayes is about to change the cryptocurrency trading landscape forever. Working out of a small office in Hong Kong, Hayes recognized a fundamental problem in crypto derivatives trading. Traditional futures contracts were clunky, expiration-driven, and didn't capture the 24/7 nature of cryptocurrency markets.

Enter perpetual swaps (also known as perpetual futures) — a financial innovation that would become the cornerstone of modern crypto trading.

The perpetual futures puzzle

Perpetual futures are unique financial instruments designed to continuously track the spot price of an underlying asset. Without a built-in mechanism to keep prices aligned, these contracts could drift wildly from the actual market value.

Imagine a scenario where Bitcoin is trading at $100,000 in the spot market, but its perpetual futures contract is trading at $102,000. This divergence creates an arbitrage opportunity and market inefficiency. Funding rates are the ingenious solution to this problem.

The trader’s dilemma: predict or lose?

Most crypto traders play a simple game: buy low, sell high (or short it and hope for a crash). It’s a high-risk, high-reward strategy, but let’s be real—no one can predict the market consistently.

What if there was a way to make money regardless of market direction?

That’s where delta-neutral trading comes in—a strategy that removes market bias and lets traders profit from inefficiencies instead of price movements.

Behind the scenes of most delta-neutral strategies is a quiet, often overlooked force we introduced above: funding rates. These periodic payments between traders can transform how you approach crypto markets—if you know how to use them.

The BitMEX Breakthrough

Hayes, alongside his co-founders, developed a revolutionary concept: a futures contract that never expires. The genius wasn't just in removing expiration dates—it was in creating a self-regulating mechanism to keep these contracts aligned with spot prices. This mechanism? Funding rates.

This innovation allowed traders to hold leveraged futures positions indefinitely without worrying about expiry and rollover.

Without an expiration date, there needed to be a mechanism to keep the perpetual price tethered to the spot market. Funding rates were created to serve this purpose by making long and short traders exchange payments every 8 hours. Over time, these payments have evolved into a powerful yield engine for delta-neutral strategies.

There needed to be a mechanism to keep the perpetual price tethered to the spot market. Funding rates were created to serve this purpose

What are funding rates (without the jargon)?

Let’s strip away the complexity.

Funding rates are like interest payments between perpetual futures traders. They exist to keep perpetual futures contracts trading close to the spot price.

Here’s how they work:

• If the perp price is higher than the spot price (bullish sentiment), longs pay shorts to incentivize sellers.
• If the perp price is lower than the spot price (bearish sentiment), shorts pay longs to incentivize buyers.

These payments happen (usually) every 8 hours on most exchanges, and the amount depends on market sentiment. The best part? Funding rates fluctuate across different exchanges—creating arbitrage opportunities for traders who know where to look.

Think of funding rates as a sophisticated balancing mechanism—part market correction, part economic incentive. This mechanism is done with funding rate's periodic settlements and its calculation methods:

Periodic Settlements. Most exchanges settle funding rates every 8 hours. This frequent adjustment ensures rapid market alignment. Traders are either paying or receiving funds based on market positioning.

Calculation Methods. Exchanges calculate funding rates using a complex formula that considers: current contract price; spot market price; market liquidity; and overall market sentiment.

Funding rate scenarios

Positive Funding Rate (Long pays Short)

• Occurs when perpetual contract price > Spot price
• Signals bullish market sentiment
• Long position holders pay a premium to short position holders

Negative Funding Rate (Short pays Long)

• Happens when perpetual contract price < Spot price
• Indicates bearish market sentiment
• Short position holders pay a premium to long position holders

Real-world funding rate dynamics

Let's illustrate with a concrete example involving Bitcoin (BTC):

Scenario: BTC spot price is $100,000

• Perpetual futures trading at $100,500
• Funding rate: 0.05% every 8 hours

Trader A goes long 1 BTC at $100,000 spot, while Trader B goes short 1 BTC at $100,500 perpetual futures

8-Hour Funding Calculation:

• Trader A (Long) pays: $100,500 × 0.05% = $50.25
• Trader B (Short) receives: $50.25

Annualized, this translates to a potential yield of approximately 54.75% Annual Percental Rate (APR) — purely from funding rate dynamics.

Here's how we got to the 54.75% APR:

1. The funding rate is 0.05% every 8 hours.
2. In a day, there are 3 funding periods (24 hours / 8 hours).
3. In a year, there are approximately 365 days.

To calculate the APR:

1. Daily rate: 0.05% * 3 = 0.15% per day
2. Yearly rate: 0.15% * 365 = 54.75% per year

Note that in real-world scenarios, funding rates are variable and can change frequently, so maintaining this APR over a full year would be unlikely (highly desirable though). This example serves as an idealized scenario for illustrative purposes.

Our Basis Trade eXecutor (BTX) is our delta-neutral platform that executes these types of trades for you and shows you the estimated APR in the Opportunities tab.

The market sentiment crystal ball

Funding rates are more than just a pricing mechanism—they're a real-time indicator of market psychology. Professional traders use them to:

• Gauge overall market sentiment
• Identify potential trend reversals
• Discover arbitrage opportunities

How funding rates vary across exchanges

Not all funding rates are created equal.

Each exchange calculates funding rates differently, based on its internal order book and market dynamics. This creates opportunities for cross-exchange arbitrage.

For example, Binance might have a funding rate of +0.05%, while Bybit offers -0.02% on the same asset at the same time. These differences might seem small, but they represent pure arbitrage potential for sophisticated traders.

A savvy trader could go short on Binance and long on Bybit—collecting funding payments on both legs. This is called the Long/Short trade, which, along with the Basis trade and the Reverse Basis trade, make up the delta-neutral strategy.

Historical funding rate patterns

Funding rates aren’t static—they reflect market sentiment and liquidity.

During the 2021 bull market, funding rates on BTC perpetual contracts consistently ranged between 0.03% and 0.1% every 8 hours. That’s an annualized APR between 32% and 876% just for holding delta-neutral trades.

In contrast, during bear markets like 2022, funding rates often flipped negative—allowing traders to earn funding on both legs of a Long/Short trade.

How funding rates create profit opportunities

Funding rates aren’t just a balancing mechanism—they’re a consistent yield source for delta-neutral traders.

Here’s how traders profit from funding rates:

1. Long/Short Funding Rate Arbitrage

This is the most common funding rate trade (and the one that powers the BTX Long/Short strategy). The setup is simple:

• Go long on one exchange where funding is negative (you’ll get paid to hold the position).
• Go short on another exchange where funding is positive (you’ll get paid to hold the position).

The result? You collect funding rate payments from both sides—without any exposure to price moves.

Example:

• Long BTC perpetual on Exchange A (-0.4%)
• Short BTC perpetual on Exchange B (+0.3%)

Your net funding profit = 0.4% + 0.3% = 0.7% per funding interval.

If you hold this trade for a week, that’s roughly 63% APR—with zero price risk.

2. Basis Trading with Perpetual Futures

Basis trading is another delta-neutral strategy that profits from funding rates combined with price spreads between spot and futures markets.

In bullish markets, perpetual futures often trade at a premium, called contango. In bearish markets, they trade at a discount, called backwardation. You don't need to memorize these terms to follow through with the strategy and understand it.

Example:

• BTC Spot Price = $100,000
• BTC Perp Price = $100,500
• Buy 1 BTC Spot at $100,000
• Short 1 BTC Perp at $100,500

Immediate profit = $500 basis spread + funding rate payments while holding.

3. Reverse Basis Trade with Perpetual Futures

In a Reverse Basis Trade, instead of buying spot and shorting the perpetual, you short the spot asset and go long on the perpetual contract. This strategy works well when the perpetual futures trade at a discount relative to the spot, and the funding environment is favorable on the long side.

Example:

• BTC Spot Price: $100,000
• BTC Perp Price: $99,500
• Trade Setup:
  • Short 1 BTC spot at $100,000
  • Go long 1 BTC perpetual at $99,500

Immediate profit:
The basis differential here is $500 ($100,000 - $99,500).

Funding rate impact:
If the funding rate on the perpetual is negative (say, -0.3% per funding interval), then as the long position you will receive funding payments. This funding yield adds to your profit over time.

Total profit potential:
Your overall profit would be the $500 basis differential, plus the accumulated funding payments, minus any trading fees. This trade profits from both the convergence of the basis and the favorable funding environment, all without directional price risk.

Step-by-Step: how to execute a Long/Short Trade on BTX

The Long/Short is the easiest trades you can do in the BTX as a delta-neutral strategy, with the other two being the Basis trade and the Reverse Basis trade. But let's stick with the Long/Short for this example.

To execute a Long/Short trade via BTX:

• Login to the BTX, you'll need a Basis NFT and some $BASIS to use it.
• Connect your exchange(s) API keys to BTX.
• In the Opportunities tab, select an asset with an interesting APR.

• Choose the amount you want to trade (start small, if you're new).
• Click Execute—BTX automatically opens both legs of the trade.

• In the Positions tab, select "Metrics" to track funding payments.

• Use the Close or Liquidate options to exit when the opportunity ends.

This process eliminates the manual hassle of managing multiple orders and ensures you capture every bit of yield. For an in-depth tutorial, check this article (it jumps to the relevant section on how to do a Long/Short with the BTX).

Common mistakes traders make with funding rate trades

Even with a solid strategy, delta-neutral trading isn’t completely risk-free. Here’s what can go wrong:

• Funding rate flips: Positive funding can turn negative, flipping who pays whom.
• Execution delays: Manual execution can lead to slippage, reducing profitability.
• Unbalanced positions: If one leg executes and the other doesn’t, you lose your delta-neutral stance.
• Exchange fees: High trading fees can eat into profits if not accounted for.

Advanced traders mitigate these risks by monitoring positions continuously and using automation tools—like BTX—that handle rebalancing and exit strategies.

How BTX automates these Trades (while you sleep)

Delta-neutral strategies sound great... until you try to execute them manually.

If you're only monitoring 1 positions and using small size, there may not be an advantage to using the BTX. But if you're monitoring funding rates across five exchanges for three different trading pairs, manually tracking these 15 different rates and their relationships is not going to be fun. Imagine all the browser tabs open and the slippage you'll pay in the end.

BTX helps with the entire process:

• Scans funding rates across multiple exchanges.
• Automatically executes an opportunity you pick
• Enters both legs of the position, minimizing slippage.
• Close the trade when it stops being profitable.

One user summed it up perfectly:

“Without BTX, this would be impossible for me. With BTX, it’s easy.”

This automation removes the need for constant manual monitoring and ensures that you capture every available yield opportunity.

Case studies: real-world examples of funding rate profits

Let's look at some hypothetical case studies of funding rate profits you could have made. You can't go back to the past, but you can learn from these historical examples and use the BTX from now on to take advantage of these delta-neutral trades and profit from funding rates.

Case Study 1: the bull market play

During the 2021 bull run, a trader set up a Long/Short trade using BTC perpetuals:

• Setup: Long BTC perpetual on Exchange A with a funding rate of -0.4%; Short BTC perpetual on Exchange B with a funding rate of +0.3%.
• Outcome: The trader collected a net funding rate profit of 0.7% per interval. Over a period of 12 days, this translated to an impressive 156% APR.
• Lesson: Even in volatile markets, if you can lock in a funding rate differential, you can earn substantial returns without being exposed to price swings.

Case Study 2: the bear market yield

In a bear market scenario (2022), funding rates can flip, but opportunities still exist:

• Setup: A trader identified that funding rates were negative on both sides due to bearish sentiment—say -0.2% on one exchange and -0.1% on another.
• Strategy: By taking opposite positions (long on the exchange with the more negative rate and short on the one with the less negative rate), the trader still collected a small net positive yield.
• Outcome: Although the rates were lower, the trader earned a modest, yet consistent, yield that provided stability during a downturn.
• Lesson: Delta-neutral strategies can be tailored to both bull and bear markets, ensuring that traders continue to earn yield even when the market is down.

Case Study 3: capitalizing on cross-exchange opportunities

Another trader focused on basis trading during a period of high market volatility:

• Setup: BTC spot was trading at $100,000 while BTC perpetuals were at $100,500.
• Strategy: The trader bought spot and shorted the perpetual, locking in an immediate $500 profit on the spread, in addition to funding payments.
• Outcome: Over a month, with stable funding rates averaging 0.03% every 8 hours, the trader earned a total profit of over $3,000 after fees and minor slippage.
• Lesson: Combining the immediate basis spread with ongoing funding payments can compound yields significantly over time.

FAQ: your burning questions answered

Q1: What exactly are funding rates?
A: Funding rates are periodic payments exchanged between long and short traders on perpetual futures contracts. They exist to keep the perp price aligned with the spot price, acting like an interest rate that can be positive or negative based on market conditions.

Q2: How often are funding rates paid?
A: Most exchanges pay funding rates every 8 hours. This means you could see three funding payments in a day, which, when annualized, can lead to very high APRs if the opportunity is consistent.

Q3: Can funding rates really offer consistent returns?
A: Yes, if executed correctly. Delta-neutral strategies are designed to capture these payments regardless of price direction. However, it’s crucial to monitor changes in rates and ensure trades remain balanced.

Q4: How do funding rates vary across exchanges?
A: Each exchange calculates funding rates based on its order book, liquidity, and market sentiment. This variability creates arbitrage opportunities where a trader can benefit by positioning on the exchange with the more favorable rate.

Q5: What are the risks involved in these trades?
A: Key risks include funding rate flips, execution delays leading to slippage, unbalanced positions if one leg of a trade fails, and high trading fees. Automated platforms like BTX help mitigate these risks by ensuring rapid, balanced execution.

Q6: How does BTX make all this easier?
A: BTX automates the identification, execution, and management of delta-neutral trades across multiple exchanges. This reduces manual errors, minimizes slippage, and maximizes your yield from funding rates.

Q7: Who can benefit from these strategies?
A: Both crypto-native traders and those with a background in traditional finance can benefit. Delta-neutral strategies remove the need for predicting market direction, making them accessible to anyone looking for steady, passive yield.

Final thoughts: the hidden yield engine of crypto

Crypto isn’t just about price speculation anymore.

From Arthur Hayes' groundbreaking introduction of perpetual swaps to today's sophisticated trading strategies, funding rates have evolved from a novel concept to a powerful trading mechanism. What was once the domain of institutional traders is now accessible to anyone with the right tools and knowledge.

The Basis Trade eXecutor doesn't just execute trades—it democratizes sophisticated trading strategies, turning market complexity into a potential consistent income stream.

Delta-neutral strategies powered by funding rates offer a smarter way to profit—without being glued to price charts 24/7 with browser tabs nightmare. Whether you're in a bull or bear market, these strategies can deliver consistent returns, provided you have the right tools to execute them flawlessly.

With BTX, you don't need to be a quant or a market maker to capture these opportunities. Instead, you gain access to an automated system that makes delta-neutral trading accessible, efficient, and scalable.

If you're ready to turn market inefficiencies into passive yield, BTX is your edge. Start trading smarter today.

Join the BTX Community

Join our community at discord.basis.markets, to learn, share, and trade smarter. We have a channel in the members area where other users share their trades. You need to have the Basis NFT, and then, while on our Discord server, go to dao.basis.markets to connect your wallet where your Basis NFT is, and you'll be given access to the members area on discord.

Also, follow along for our Basis Play of the Week series on X (follow us there), where we showcase the best funding rate trades from the past 7 days.