Happy Monday, friends!

Inefficiencies exist in the crypto perpetual market, and traders can take advantage of mispricings and earn a profit.

The cash and carry trade is a profitable strategy that allows traders to take advantage of the discrepancies between perpetual and spot price.

This newsletter is brought to you by Nektar.

Nektar is a Decentralized Infrastructure Marketplace that connects Networks, Operators, and Delegators to enhance liquidity, optimize infrastructure, and implement custom incentives. By fostering collaboration across decentralized economies, it enables participants to benefit from shared incentives without compromising their autonomy.

As Nektar prepares for launch, major developments signal its transformative potential. Over 15 high-profile partners, including leaders in the DeAI space, are set to join the platform, expanding its reach and influence.

The reward system is anticipated to drive a surge in participation, offering native APY opportunities and tailored campaigns. Integration with leading staking providers is underway, with commitments hinting at a flow of 30K wETH toward partnerships, boosting liquidity and engagement.

Additionally, veNET token holders will benefit from increased yield as network rewards are partially allocated to them. The ecosystem is primed for exponential growth, supported by key partners incentivizing Nektar adoption within their respective networks, solidifying its position in the decentralized economy.

Nektar’s NET token will be live on exchanges Dec 3, starting with Gate. More info here:

Buy the $NET token here

Funding - earning 25-50% passive income per year with the cash/carry strategy?

Inefficiencies exist in the crypto perpetual market, and traders can take advantage of mispricings and earn a profit. The cash and carry trade is a profitable strategy that allows traders to take advantage of the discrepancies between perpetual and spot price.

Traders can utilize both CEX’es and DEX’es to take arbitrage positions without exposing themselves to high fees. You can use this strategy to take long positions in assets while simultaneously selling associated futures derivatives and earn the funding rate when the market is long-skewed. For some of you this may sound very advanced, but rest assured, I will break it down ELI5-style.

What is the funding rate?

The funding rate is a recurring payment that traders pay or receive based on the disparity between perpetual contracts and spot prices. This rate is determined by the skew of the derivative and the extent to which the perpetual contract deviates from the spot market.

When a Perpetual Swap contract trades at a premium, the skew on Binance/Bybit/dYdX/Hyperliquid has turned positive. Similarly, when the Perpetual Swap contract trades at a discount, the skew on the DEX/CEX has turned negative.

Basically what we are going to do is to do what Ethena Labs is doing (long ETH spot, short ETH perp), but we are going to do it ourselves + we are going to choose the asset we want (hint: it doesn’t have to be ETH).

If you’re not sure about what Ethenea Labs is, I wrote about them here:

If you don’t want to read that, I’ll try to explain it as easily as I can.

If we use Ethereum as an example, we want to go long ETH (preferably staked ETH).

Let’s use stETH as an example (3.6% APR), and we want to short $ETH on perp (eg. on Binance or Bybit).

So if we are equally long and short, we will be delta neutral. This means that no matter what happens to the ETH price, we will not lose/earn money by ETH price fluctuation.

A delta-neutral strategy is one that attempts to construct a portfolio or group of positions that have no directional risk to the market. For example, if I both open a long trade of 1 ETH and a short trade of 1 ETH at the exact same price, then regardless of the movement of the market, my total portfolio value will not change (ignoring fees).

What we will earn money from is ETH staking yield and funding rate on ETH.

Funding is the primary mechanism to ensure that the last traded price is always anchored to the global spot price. It is similar to the interest cost of holding a position in spot margin trading.

The funding fee is exchanged directly between buyers and sellers at the end of every funding interval. Using an 8-hour funding time interval as an example, funding will occur at 12 AM UTC, 8 AM UTC, and 4 PM UTC.

Note that on DEX’es like dYdX and Hyperliquid funding is paid/recieved every 1 hour, not every 8 hour as on Binance/Bybit.

• When the funding rate is positive, long position holders pay the short position holders. Likewise, when the funding rate is negative, short position holders pay the long position holders (this is the case for bull markets, I will come back to this)
• Traders will only pay or receive a funding fee if they hold a position at the funding interval (12 AM UTC, 8 AM UTC, and 4 PM UTC). Unless you use dYdX or Hyperliquid which is every hour
• If positions are entirely closed prior to the funding exchange then traders will not pay or receive funding fees.
• The funding fee charged will be deducted from the trader’s available balance. In the event where trader has no sufficient available balance, the funding fee will be deducted from the position margin and the liquidation price of the position will be more prone to the mark price. The risk of liquidation will increase.

Let’s decode the funding rate you see in the image. Different perpetual exchanges across different chains will use slightly contrasting mechanisms to calculate funding rates but as a trader you want to understand the time period in which funding is paid/received as well as how the funding rate fluctuates over time. To calculate the annual APR using the funding rate above the calculation is as follows:

For Hyperliquid:

0.0540% * 3 = 0.162% (1 day APR)

0.162% * 365 = 59,3% (1 year APR)

As you can see the funding is lower on Binance, so this would equal a 31,2% APR (same calculation as above). Further, you can see that there is an arbitrage opportunity between Hyperliquid and Binance, meaning that you could long ETH perp on Binance and short ETH perp on Hyperliquid, then collect the net difference between 59,3% and 31,2% which is 28,1%. There are some drawbacks with this method though:

1. Since funding will vary, you might risk that the funding on the long side on Binance will go higher than Hyperliquid = you lose money
2. Since you are not in spot on the long side you won’t get any staking rewards which reduces the yield.

There is one advantage though with perps on both the long and the short side though (you can use leverage which makes it very capital efficient). Would probably be best to make an Excel sheet for yourself to compare and see which alternative would be best for you.

When the funding rate is positive (as per our example) traders that are long pay the funding rate whereas traders who are short receive the funding rate. This is important as it sets the stage for understanding how we can build delta-neutral strategies to use the funding rate to our advantage.

Cash and carry

The simplest strategy commonly known as the cash and carry trade is to buy the spot asset and sell the perpetual future in the same size. The funding rate presented above is for the crypto asset ETH. The trade would look as follows:

Buy 10 ETH/stETH spot ($37,000)

Short 10 ETH ($37,000) on a perpetual exchange (dYdX, Hyperliquid, Binance, Bybit).

ETH is trading at approximately $3,700 at the time of writing this article and therefore to execute this strategy a trader needs to ensure that they are able to as effectively as possible both buy and short the asset in equal size and price as possible in order to eliminate what is known as leg risk. Leg risk is the risk that when putting on the two sides of the trade that the markets moves so that the two sides don’t end up balancing each other out i.e. they are not market neutral.

The goal of the above trade is to pick up the 59% in annualised funding regardless of if the market trends up or down. While this sounds too good to be true, a trader must understand how funding rates can vary across different exchanges but also different assets.

Your daily yield from funding will be: Funding Fee = Position Value x Funding Rate

Let’s use 0.0321% as it is on ETH right now.

• Daily payment from funding: 10 ETH x 3,700 = $37,000 x 0,0540% = $20 x 3x per day = $60
• Daily payment from staking yield: 10 ETH x 1,036 = 0,36 ETH per year / 365 = 0,001 ETH per day = $3,700 x 0.001 ETH = $3,7

So in total, it’s $60 + $3,7 per day = $63,7. For some, this might be a lot, for others this is nothing.

Let’s look at some of the risks/challenges:

-opening long/short simultaneously is hard: go and look at Binance/Bybit on the prices for ETH on spot vs. ETH on perp/futures. do you see a difference?

As I am writing this right now the price is $3,852 on spot and $3861 on perp.

First of all, how do you do it? Try yourself with a small amount and see that it will basically be impossible to catch the perfect long/short. The spread in this case is $9.

Should you go long first and then hope that the price increases so you can short higher? Or should you short first and hope that you can buy spot lower? Should you DCA and hope that you get an equal long/short entry?

-fees for open/close perp and open/close spot: this is obvious, but you have to pay trading fees for opening and closing positions, so if you don’t plan on holding for at least 24 hours you might lose due to trading fees

-rebalance if low capital: you’re equally long and short. what happens if you’re very skewed? like let’s say ETH doubles and goes to $7,600. Your position would now been deeply red, while your long position is very green. Watch out for liquidation.

-liquidation risk: Depending on the amount of capital you have available on the exchange, you’ll be in danger of getting liquidated on the short side if the position goes very much against you.

-funding can (and will change): pretty self explaining…

-closing long/short simultaneously will be equally hard as opening: not much more to say about this, see the first point.

-CEX risk: what if Binance/Bybit goes under? Similar to smart contract exploit in the DeFi world

-fat finger: if you’re not experienced with perps you should be very careful. Over and over again you see people buy market orders that create giga wicks and you end up getting a very bad price. Also, it’s just a push of a button to close/long a position. Be careful so that you don’t fuck up the trade.

Btw, you could also check out option trading…it might be easier and save you some money :)

I just wanted to show you how you could do the Ethena Labs trade yourself.

…

That is it for today.

See you in the orderbook, anon.

Disclaimer:

1. This article is reprinted from [Substack]. All copyrights belong to the original author [Nektar]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute investment advice.
3. The Gate Learn team translated the article into other languages. Copying, distributing, or plagiarizing the translated articles is prohibited unless mentioned.