Bybit Guide

Make use of Bybit's funding fee arbitrage mechanism, to stand to profit from your trades. This handy article will guide you through the process.

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 market has launched a funding fee mechanism in order to anchor the contract price to the spot price. According to this mechanism, if the market is bullish and the long side prevails, the price of the perpetual contract will be higher than the spot, and the funding fee will be positive. Conversely, the short side will pay the multiple sides. The specific rules are summarized as follows.

When the funding rate is positive, multi-users (i.e., contract buyers) pay the funding fee to the short side (i.e., contract sellers); when the funding rate is negative, the opposite occurs.

How Does Bybit’s Funding Fee Arbitrage Work?

Funding rate arbitrage is a value-neutral hedging strategy that allows a trader to take a position in the 

 against the same pair as the contract market, thus achieving a hedging effect. Any losses due to price movements in the contract market are offset by gains in the Spot market (and vice versa), allowing traders to earn capital fees without closing their positions.

According to this feature, it’s possible, in theory, to achieve high returns if you hold positions corresponding to those coins whose funding fees are consistently high, without considering the risk of coin price fluctuations. In other words, if the funding rate of a currency is very high and the rate is maintained for a long period of time, investors have the opportunity to keep gaining via the funding rate mechanism.

 are settled every 8 hours, at 00:00 UTC, 8:00AM UTC and 4:00PM UTC, respectively.

 as an example. According to the historical data of the Bybit Perpetual contract funding rate, the contract’s funding rate has been positive and in the high end for a long time. Theoretically, this means the user can receive funding fee income as long as they hold a short position.

However, it should be noted that the above revenue strategy doesn’t take into account the risk of coin price fluctuations. Although investors can receive the capital fee gain as long as they hold a short position in LUNA2 (buydown), if the market moves against the expectation (i.e., if the price of LUNA2 rises), the current position faces a loss. So, in order to hedge the risk, investors need to buy the equivalent LUNA2 Spot or hold the equivalent LUNA2 long position in the margin market.

Mastering the Capital Rate Arbitrage Strategy

In order to master the funding rate arbitrage strategy, you’ll want to focus on these two aspects.

1. Currency selection: High funding rates + long duration

When selecting your currency, choose those with very high funding rates that are sustainable as well.

Before adopting a funding rate arbitrage strategy, you can check the funding rates of all contract currencies through 

2. Use both spot and margin markets to take two-way positions in order to hedge against the risk of currency price fluctuations.

In order to cope with the risk caused by the fluctuation of the currency price, when you take a position in a Perpetual contract with a capital rate arbitrage strategy, you need to hedge the same position with Spot or margin in order to achieve long-term profitability.

Using The Capital Rate Arbitrage Strategy on Bybit

1. Money Rate — Spot Arbitrage on Perpetual Contracts

b. Simultaneously, open a short order for the same position in the corresponding currency Perpetual contract.

c. According to the profit target, close the short position of the Perpetual contract at the right time and sell the Spot to earn profit.

 Assuming the current BTC price is 20,000 USDT and the funding rate is 0.03%, use 2,000 USDT for funding rate arbitrage.

1. Buy 1,000 USDT BTC Spot and short 1,000 USDT BTC Perpetual contract

2. Assuming equal funding rates, every 8 hours you’ll receive 1,000 USDT × 0.03% = 0.30 USDT every 8 hours 

3. Receive 0.30 × 3 = 0.90 USDT per day, annualized rate of return 0.90 × 365 ÷ 1,000 = 32.95%

1. Buy 1,500 USDT BTC Spot and short 500 USDT BTC Perpetual contract

2. Assuming equal funding rates, you’ll receive 1,500 USDT × 0.03% = 0.45 USDT every 8 hours 

3. Receive 0.45 × 3 = 1.35 USDT per day, annualized rate of return 1.35 × 365 ÷ 1,000 = 49.275%

 The hedging value should be equal to ensure that the hedge is achieved.]

In a nutshell, you can create a position with the same value and opposite direction in the spot/margin and perpetual contract markets, respectively.

2. Perpetual Contract Funding Rate — Margin Arbitrage

Given that margin transactions involve margin interest rates on borrowed currencies, users need to consider the potential impact of margin rates when adopting a funding rate arbitrage strategy.

a. When the funding rate is positive and | funding rate | > margin rate + commission rate, the short side of the contract can charge the long side a funding fee — i.e., the Perpetual contract is opened short and margined to buy a position of comparable Spot value.

b. When the funding rate is negative and | funding rate | > margin rate + commission rate, the long side of the contract can charge the short side a funding fee; the Perpetual contract opens long, and margins to sell a position of comparable value to the spot.

Overall, considering the transaction costs, here’s what the size of the arbitrage space between the Perpetual contract and the Spot margin trade is derived from:

The difference between the Perpetual contract funding rate (floating rate) and the fixed rate.

Bybit adopts a tier-rate system: The higher the account level, the lower the transaction fee rate and lending rate. 

to develop a reasonable funding rate arbitrage strategy to obtain higher returns.

1. Reduce margin levels to prevent your position from blowing up due to abnormal price fluctuations. Although capital rate arbitrage can be low-risk, or even risk-free, based on the convergence of Perpetual contracts and Spot prices, it’s still necessary to remain cautious.

2. Do your research and choose your currency carefully. If you want to profit from the funding rate strategy, you’ll need to do thorough research on the relevant currencies and the details of the funding rate. Try to choose currencies with high rates and long durations.

3. Invest a reasonable amount of capital in order to limit your trading risk. As small-cap currencies may not have enough market depth, investing large amounts of money in them may produce high levels of 

4. In order to avoid high transaction fees from high-frequency position transfer and currency hedging, avoid frequent trading between coins, which may make it difficult to turn a profit. 

How to Earn Money Using Bybit Funding Fee Arbitrage

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