Capitalizing On Bitcoin Funding Rate Differences with Interest Rate Swaps
Funding rates are what keep perpetuals prices close to the underlying spot price. Typically funding rates for perpetual futures that track the same thing (eg ETH perps, BTC perps) are somewhat similar. But there’s been a large discrepancy on the funding rate for Binance and FTX BTC perps on Strips. We find this curious. There may be alpha to be had.
When you trade interest rate swaps (IRS) on Strips, the floating rate is the current funding rate at the referenced exchange, and the fixed rate is quoted by the market on Strips. The fixed-rate is priced using our AMM; it represents the market’s future prediction of the funding rate. Whereas the floating rate represents the current funding rate at that point in time.
As of May 8th 2022, the delta is dramatic between FTX and Binance rates on Strips: Binance floating rate is 10.95% and fixed is 2.16% (879 bps spread); FTX floating is 3.50% and fixed is 1.79% (171bps spread). You can capitalize on this large Binance fixed/floating spread only on Strips.
When you go long on Strips you are receiving the floating rate and paying the fixed; this difference is called the funding PnL. You are also long the fixed-rate, meaning you’ll profit if it rises and vice versa; this is similar to spot trading and is called the trading PnL. Going short on Strips means all the aforementioned is inverted: you pay floating, receive fixed, and are short the fixed-rate from a trading perspective.
So if you go long Binance BTC perp funding rates on Strips, you’ll capture the large positive spread on the Binance floating rate vs fixed, and will be wagering that the Binance BTC fixed rate will stay stable or rise while collecting the difference between the fixed and floating rates (spread).
Additionally, with Strips you can use leverage on this trade, up to 10x. An example scenario: you can take $10k USDC, put on $100k notional long Binance BTC IRS trade. Assuming that 879bps spread remains that’s ~$8,790/month in funding PnL.
As you might be starting to realize, there is potentially large funding PnL to be captured when floating and fixed-rate differences are large. This concept applies to all of our markets.
Regarding your total PnL: there are two PnL calculations occurring when you place this trade. The funding PnL is an exchange of cash flows between the floating and fixed rates (this is the emphasis of this article). The trading PnL is effectively a spot trading position of the fixed rate.
While the trading PnL isn’t the core focus of the strategy in this article, it’s still very relevant as you will have fixed-rate exposure from a trading perspective. Please give the following links a brief read to see how Funding PnL and Trading PnL are calculated.
Important to also note that the concepts in this piece are applicable to any market traded on Strips! So even if you don’t capitalize on this BTC strategy specifically, you’re now equipped with new information on what to look for and how to trade in our IRS markets.
Disclaimer
The information presented here is meant for educational purposes, and is not investment advice. Any past performance, projection, forecast or simulation of results does not necessarily indicate any investment’s future or likely performance. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by STRIPS Finance.
