Strategy Spotlight: BTCUSD Inverse Perpetual and Inverse Futures

Traders, things are heating up now at Bybit’s 7-Day Challenge. Be among the top participants to walk away with a share of the 400,000 USDT Prize Pool!

There are many ways to boost your P&L(%) ranking. In case you’d like a tip or two, here’s a good place to start: Try the interest rate arbitrage strategy.

The funding rate on BTCUSD Perpetual Contracts, calculated every eight hours, represents the short-term floating interest rate. The basis on Inverse Futures Contracts — BTCUSD0625 and BTCUSD0924 — signifies the longer-term interest rate.

If you take offsetting positions in these two markets, you can balance out losses from one position with gains in another, while speculating on the differences between short-term interest rate (perpetual funding fee) and long-term interest rate (futures premium).

Here is a quick example.

Let’s assume that on March 1, the BTC spot price is $50,000 and BTCUSD0625 is traded at $55,000, a 10% premium relative to the spot price.

Leo, our competitive trader, enters 1 BTC worth of short position on BTCUSD0625 Futures Contracts priced at $55,000 and 1 BTC worth of long position on BTCUSD Perpetual Contracts at $50,000.

On March 10, BTC spot price and Perpetual Contract price remain at $50,000. But the BTCUSD0625 Futures price drops to $53,000, a 6% premium relative to the spot price.

For his BTCUSD0625 short position, Leo would secure a profit of 0.038 BTC {55,000 X (1/53,000 – 1/55,000)} from premium narrowing (roughly 3.8%).

Let’s assume the funding rate is 0.01% for every eight hours. Over the time period of 10 days, Leo would pay a funding fee of roughly 0.3% (0.01% x 3 x 10) of his BTCUSD long position value.

Eventually, Leo’s net profit on interest rate speculation would be 3.5% (3.8% – 0.3%) of his position value. The interest rate arbitrage strategy allows Leo to finish the week stronger.

Now it’s your turn. Good luck!