📖 FUNDING ARB — BEGINNER GUIDE
Everything you need to understand delta-neutral funding rate arbitrage. No finance degree required.
1 WHAT IS A FUNDING RATE?
Perpetual futures & the funding mechanism
Crypto exchanges offer perpetual futures — contracts that let you bet on a token's price going up or down, with no expiry date. Unlike spot trading, you don't actually own the token.
The problem: if everyone is bullish and buys longs, the futures price drifts above the real (spot) price. To fix this, exchanges charge a funding rate — a periodic fee paid between longs and shorts to keep prices aligned.
Funding is paid every 8 hours (on most exchanges). When the rate is positive, longs pay shorts. When negative, shorts pay longs. The rate constantly adjusts based on market sentiment.
💡 Example: BTC funding rate is +20 bps (0.20%). You have a $10,000 long position. Every 8 hours you PAY $20 to short holders. Over 30 days (90 periods) that's $1,800 cost — just for holding the position.
2 WHAT IS DELTA-NEUTRAL?
Hedging away price risk
Delta measures how much your profit changes when the token price moves. A long position has positive delta (you profit if price goes up). A short position has negative delta (you profit if price goes down).
Delta-neutral means your positions cancel out — you don't care whether the price goes up or down. You hold equal long and short positions simultaneously, so price movements don't matter.
💡 Example: You LONG $10,000 SOL on Exchange A (which charges −15 bps) and SHORT $10,000 SOL on Exchange B (which pays +10 bps).
If SOL price doubles: your long gains $10k but your short loses $10k. Net price impact = $0. You are delta-neutral.
But every 8 hours, Exchange A pays you 15 bps (negative rate = shorts get paid) and Exchange B pays you 10 bps. You collect funding from both sides.
5 RISKS TO UNDERSTAND
⚠ Rate reversal
The #1 risk. Funding rates change every 8 hours and can flip completely. A spread of +50 bps can go to −10 bps within a day. Always monitor your positions and set alerts.
⚠ Liquidation risk
Even though you're delta-neutral overall, each exchange sees your position independently. If the price moves sharply, one leg can get liquidated before the other. Use low leverage (1x–3x) and keep sufficient margin on both sides.
⚡ Trading fees
Opening and closing both legs costs ~0.02%–0.05% per side per exchange. For a $10,000 position, entry + exit can cost $40–$200 total. The spread must be large enough to cover fees before you profit.
⚡ Slippage
On large positions or low-liquidity tokens, your actual fill price may differ from the quoted price. Use limit orders where possible and check order book depth before entering.
Exchange risk
CEX can suspend withdrawals, get hacked, or fail (FTX 2022). Never keep more funds on an exchange than you need for the position. DEX smart contracts can also have bugs. Diversify across platforms.
Margin / collateral
You need to post collateral on both exchanges simultaneously. Capital efficiency is lower than it looks — a $10,000 theoretical position might need $15,000–$20,000 in total margin across both accounts to stay safe.