Funding rate arbitrage: earning the difference between exchanges
The same coin pays a different funding rate on different exchanges. Go long where the rate is lower and short where it is higher, and the price moves cancel out while the rate difference is yours. Below: how it works, how to count the income honestly, a step-by-step example, and where this strategy leaks money.
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What funding is and why it differs between exchanges
A perpetual future has no expiry, so its price is held close to spot by payments between traders - the funding rate. When longs dominate and the contract trades above spot, longs pay shorts; when shorts dominate, the other way round. The mechanism is covered in detail in our funding rate explainer.
Each exchange calculates the rate from its own positions and its own formula. The crowd on one exchange may be piling into a coin with high leverage while on another the same coin barely interests anyone - and the rates drift apart. On major coins the gap is usually small; on altcoins, especially on days of strong moves, it can be many times larger.
The second reason is the settlement period. One exchange pays every 8 hours, another every 4 hours or every hour, and on some coins the period changes when the rate hits its cap. You cannot compare "0.03%" and "0.05%" until both are converted to the same period.
| What to compare | Why it matters |
|---|---|
| The rate over the same period (per 8h or per day) | Otherwise a more frequent payment looks smaller than it is |
| The settlement period on each exchange | Income arrives only at settlement |
| Time to the next settlement | It decides when the first payment lands |
| The rate history over days, not one value | A one-off spike disappears quickly |
| Volume and open interest | An illiquid coin is hard to enter and exit without losses |
How the trade works
Find two exchanges with different rates
Compare rates converted to the same period: 0.03% per 4 hours and 0.05% per 8 hours are 0.18% and 0.15% a day, not the other way round.
Short where the rate is higher
With a positive rate the short receives funding. With a negative rate everything mirrors: the long receives.
Long the same size where the rate is lower
The long pays less than the short receives. The coin price barely matters: one leg gains what the other loses.
Hold while the difference lasts
Watch the rates every period and the margin on both accounts.
Close both legs at once
When the difference narrows or flips. Closing one after the other leaves a leg unhedged for at least a few seconds.
A step-by-step example
Say a coin trades at $2.00. Exchange A pays +0.05% per 8 hours, exchange B +0.01% per 8 hours, same periods. Capital is $2,200: $1,100 on each exchange, $1,000 positions at about 1x leverage so margin has plenty of room.
Short 500 coins on exchange A at $2.00
A $1,000 position. Every 8 hours it receives 0.05% - $0.50.
Long 500 coins on exchange B at $2.00
A $1,000 position. Every 8 hours it pays 0.01% - $0.10.
The price rises to $2.20
The short loses $100, the long gains $100. Net price result is zero, but margin on account A has shrunk, so it needs a buffer.
Three days later the difference narrows
Close both positions together and count the result.
| Short on exchange A, rate +0.05% / 8h | +$0.50 per period |
| Long on exchange B, rate +0.01% / 8h | −$0.10 per period |
| Difference per 8 hours | +$0.40 |
| Over 3 days (9 periods) | +$3.60 |
| Fees: entry and exit, 4 trades at ~0.05% | −$2.00 |
| Result after 3 days | ≈ +$1.60 |
Fees eat the first day and a half or two. Short funding arbitrage loses money: the income only comes from holding, and the longer the difference lasts, the better the result.
On $2,200 of capital that is about 0.07% over three days. Small, but with no bet on market direction. It grows when the difference is wider (on altcoins in frenzied periods it reaches 0.1-0.3% per period) or when the position is held for weeks.
How to choose pairs
- Stability beats size. A 0.04% difference that lasts a week beats a 0.2% one that is gone by the next settlement.
- Liquidity on both legs. If one exchange has a thin book, slippage on entry and exit eats several periods of funding.
- Close entry prices. If the long exchange is noticeably more expensive than the short exchange, that gap is your loss at close unless prices converge.
- Matching settlement times, or at least knowing when each payment lands. Otherwise for the first hours one leg pays while the other has received nothing.
- A sane rate. An enormous rate often means the coin is at the centre of a violent move - and the risk of a sharp reversal grows with the funding.
Where the money leaks
- The rate changes. Funding is recalculated every period, and the difference can vanish or flip. Look at the rate history, not a single value.
- One leg liquidated. In a sharp move a leg with thin margin can be liquidated, leaving the other naked - and the strategy turns into an ordinary directional bet. Keep spare margin and moderate leverage, and watch the liquidation price.
- Settlement time. Funding goes only to whoever holds the position at settlement. Opening a minute before it does not earn the full period: exchanges look at the position at the snapshot, and the contract price ahead of settlement often already reflects the coming payment.
- Fees and slippage. Four trades to enter and exit, at imperfect fills. On a short hold they exceed the income.
- Exchange risk. Money sits on two exchanges at once. A withdrawal halt, an outage or a rule change on either affects the whole position.
The easiest place to see where rates diverge right now is the funding board: every exchange's rate for each coin, normalised to one period, plus open interest moves. It is on the funding page.
Glossary
- Funding rate - the periodic payment between longs and shorts of a perpetual future.
- Settlement period - how often funding is charged: every 8, 4 or 1 hour.
- Delta-neutral position - a long and a short of equal size whose result barely depends on price.
- Leg - one of the two positions of the trade.
- Open interest - the total of all open positions in a contract.
Funding rate arbitrage FAQ
How much can funding rate arbitrage earn?
Usually fractions of a percent of the position per day: a 0.04% difference per 8 hours gives about 0.12% a day before fees. The income depends on how long the difference lasts and on entry and exit fees.
Do I need to move money between exchanges?
No, the coin is not transferred anywhere. You need margin on both exchanges, one position on each. A transfer is only needed to top up margin on one side during a strong price move.
What leverage should I use?
The lower the leverage, the further the liquidation price and the calmer the hold. High leverage raises return on capital but in a sharp move risks liquidating one leg, after which the position is no longer hedged.
What if the rate flips?
If the difference disappears or turns against your pair, close both legs together. Holding on means paying funding instead of receiving it.
Can I do it on a single exchange?
The classic version is long spot and short perpetual on one exchange: not cross-exchange arbitrage but collecting funding with a hedge. It is covered in the spot-futures arbitrage article.
Is it risk-free?
No. Price direction risk is mostly removed, but the risks of liquidating one leg, rate changes, fees and trouble on one of the exchanges remain.
Bottom line
Funding arbitrage is a slow strategy: small income per period, but independent of market direction. It works when the rate difference lasts for days, fees are counted in advance and there is enough margin for sharp moves.
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