Arbitrage trading is an important investment method in the cryptocurrency market. It profits by capturing price differences of assets across different trading platforms and contract types. Simply put, what is arbitrage? Arbitrage is the practice of exploiting short-term opportunities created by market information asymmetry and price discrepancies by simultaneously buying and selling the same asset to lock in profits. The most common forms of arbitrage in the current market include spot arbitrage, funding rate arbitrage, and futures contract arbitrage.
How does funding rate arbitrage generate profits?
Funding rate arbitrage is one of the most widely used arbitrage strategies in the market. In the cryptocurrency perpetual contract market, long holders are required to pay funding fees to shorts periodically, or vice versa. Traders use this fee mechanism to construct risk-free or low-risk returns.
When the funding rate is positive, longs pay fees to shorts. At this point, savvy traders will buy the asset in the spot market while in the perpetual contract market