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Apr 04, 2024
Educational
A Crypto Trader's Guide to Earning Yield: Funding Rates and Basis Trading
by Orderly Network
A Crypto Trader's Guide to Earning Yield: Funding Rates and Basis Trading

Crypto bros love gains but there’s something we like even more. It's a stable yield. A place where we can park our earnings and live off the yield, like our TradFi friends and their dividends.

Many saw UST in anchor as a way to sit back, relax and outperform any other yield destination that our normi friends were getting… yes that ended brutally but to many that wasn’t even a great yield.

The whole time there has been a sustainable yield source, earning traders 40% APRs. It’s all created through yield earned from perps. At Orderly, we love perps. It’s our flagship product.

So how does it work? Our job as a perp provider is to ensure perps are trading near the price of spot. If the future price is higher than spot we want people to open a short position, and we also need to encourage long traders to close their positions. We do that by making the long traders pay interest to the people holding shorts. The interest payments on the long traders start eating into their positions and if it becomes extremely high it will hurt too much to have the position open and users will close them.

Sometimes the yield is also so juicy to go short that traders will decide to just farm that position. In crypto it normally always pays to hold a short for yield, as most traders are bullish long term and demand long positions. It does go the opposite sometimes when the market is incredibly bearish, like UST collapse vibes.

So how do you actually take advantage? First go to a website like https://terminal.sharpe.ai/ to view several funding rates.

As you can see below, the funding rate on Orderly DEXs for bitcoin is at 0.0596% every 8 hours. Take 0.0596% X 3 (funding is every 8 hours) X 365 = 65.262% APR

That’s a 65% yield for holding a short position!

But you don’t want to just hold a short position. Our coins always go up, right? To hedge that you also want to hold spot positions. So the trade is hold spot and go short with leverage.

Let's take 1 BTC for example. You buy bitcoin for 70K ish, depending on when you read this. You then open a short of equal size and start earning 65% yield on it. When the bitcoin price goes up your futures position takes a loss but you are holding a bitcoin so you can always settle it and rebalance.

Earning yield through funding rates and basis trading requires attention to market conditions, disciplined risk management, and ongoing strategy adjustment. By understanding the mechanics behind these strategies and maintaining an informed, cautious approach, traders can potentially secure a steady yield.

Notes:

  • The yield from funding rates is variable and market-dependent; it is not a guaranteed 65%.
  • The hedging strategy does mitigate risk but does not eliminate it. There are costs involved, including potential funding rate payments, trading fees, and the spread between futures and spot prices.
  • This strategy requires constant monitoring and adjustment, especially considering the volatility of the crypto market.
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