A surge in bitcoin funding rates is indicating a prevailing bullish sentiment, creating an enticing arbitrage opportunity for savvy traders, particularly in the crypto hedge fund sector. As bitcoin reached nearly $57,000 on Tuesday, the highest since late 2021, the year-to-date gain stood at an impressive 32%, with the CoinDesk 20 index trading nearly 6% higher.
The annualized funding rate for bitcoin perpetual futures on Binance surpassed 100%, a milestone not seen in at least a year, according to data from Velo Data and CoinGlass. Bybit and Deribit also experienced notable increases, reaching 95% and 56%, respectively.
Perpetual futures, lacking an expiry date, utilize funding rates to align prices with spot prices. A positive funding rate indicates that perpetuals are trading at a premium to the spot price, requiring long or buy positions to pay fees to short positions every eight hours.
Markus Thielen, founder of 10X Research, attributed the rising funding rates to traders making bullish bets in anticipation of continued inflows into U.S.-based spot ETFs. With open interest climbing to $14.4 billion, Thielen noted that traders are growing confident in the bullish potential brought about by the halving and ETF inflows.
The surge in funding rates presents an attractive opportunity for non-directional traders or arbitrageurs. Thielen highlighted that arbitrageurs can capitalize on the elevated funding rate by shorting perpetual futures and simultaneously buying the cryptocurrency in the spot market. This strategy allows them to profit from the premium while mitigating price volatility risks.
Elevated funding rates in perpetual futures are generating exceptionally high arbitrage spreads, especially for crypto hedge funds. Thielen noted that BTC and ETH are trading at premiums of 20% and 30% or even higher, making it a favorable environment for arbitrage books. In summary, the current crypto market is offering favorable conditions for both long-term investors and those engaging in perpetual spread strategies, marking it as an opportune period for crypto participants.
