Exploring Risk and Return Profiles of Funding Rate Arbitrage on CEX and DEX

Perpetual futures, non-expiring swap contracts, dominate cryptocurrency markets with over $100 billion in daily trades. This instrument provides leveraged exposure to cryptocurrencies without rollover or direct holding requirements. A pivotal mechanism in this market is the funding rate, a periodic payment between buyers (longs) and sellers (shorts) in perpetual futures contracts to keep the contract price close to the market value of the asset. This study scrutinizes the risk and return profiles of funding rate arbitrage in cryptocurrency perpetual futures markets, leveraging data from major exchanges such as Binance and Bitmex, alongside decentralized platforms like ApolloX and Drift. Key assets, including BTC, ETH, XRP, BNB, and SOL are examined. Empirical analysis of arbitrage strategies, contrasted with the Hold-On-for-Dear-Life (HODL) approach, uncovers diversification benefits as funding rate arbitrage exhibits no correlation with HODL strategies. Moreover, the impact of leverage on arbitrage efficiency is assessed, revealing the nuanced nature of leverage's influence on gains. Evaluation of 60 arbitrage scenarios underscores the potential range of returns, positioning funding rate arbitrage as a stable yet rewarding alternative to HODL strategies. This study presents evidence that funding rate arbitrage can generate substantial returns—up to 115.9% over six months—while keeping possible losses to a minimal 1.92%. These results underscore the attractiveness of funding rate arbitrage strategies for investors and call for further scholarly inquiry into the area.