Funding Rate Arbitrage

Definition ∞ Funding Rate Arbitrage is a trading strategy that seeks to profit from differences between the funding rates of perpetual futures contracts and the spot price of the underlying asset. Traders simultaneously take opposing positions in the perpetual futures market and the spot market. This allows them to collect or pay funding rates while hedging their directional price risk. The strategy aims to capture the spread between these two market segments.
Context ∞ In cryptocurrency markets, Funding Rate Arbitrage is a common practice among sophisticated traders due to the volatility and unique structure of perpetual futures. News often reports on the impact of funding rates on market sentiment and liquidity. A key discussion revolves around the capital efficiency required for this strategy and the associated execution risks. Future developments include more advanced trading tools and increasing institutional participation, which could influence the stability of funding rates.