BitMex funding rate, direct cause of BTC exchange rate changes

Hi all,

I've done some research on BitMex funding rate. The reason for this was simple, there are similar anomalies in the market caused by interest rates being paid/charged overnight, such a kind of strategy on FX is also known as carry trade and is proven to work by many research papers out there.

So, why not to try the same with crypto? However, we don't any central banks setting an interest rate here, nevertheless we do have exchanges which pay/charges a certain interest rate (at BitMex known as Funding Rate) to keep the supply and demand on their perpetual contracts stable. This funding rate is charged/paid every 8 hour period. Let's call this anomaly an 8 hour effect.

Thus, my motivation was to ask, whether traders who are long and the funding rate is negative, will rather close their position to avoid the additional payments. This should raise the contract supply and the price is assumed to drop from here.

With the following research question: Does an 8 hour effect (anomaly) exists on XBTUSD and ETHUSD contracts?

Initial research question was confirmed and there was an anomaly found. However, this anomaly does not happen before the funding rate is paid/charged. More oppositely, it happens right after the new funding rate is announced.

I also made a more "research paper" like post on medium if you were the type of guy who likes to see what's behind. It's here: BitMex Funding Rate Moving The Bitcoin Exchange Rate. I also have Jupyter notebook in which this analysis was conducted (in python), if you wanted to replicate the research yourself, let me know here on in pm, I can send it.

“Bitcoin cash and carry (spot buying BTC and simultaneously future selling for delivery in 1-6 months) will net you 7-10% annualized return .. almost risk free.”

https://cointelegraph.com/news/bitco...isk-says-planb

Your synthetic USD also earns or pays interest. The XBTUSD product is a leveraged total return swap. Longs and shorts exchange interest payments every 8 hours. We call this funding, and it is used to anchor the XBTUSD price to the underlying spot price of Bitcoin.
As many like to say, Bitcoin will either be worth a lot or very little. If you short Bitcoin, the maximum unlevered return is 100%. If you go long Bitcoin, the maximum unlevered return is infinity. As a result, speculators are willing to pay high interest rates to go long Bitcoin using leverage. The funding rate swings both ways, but since May 2016, XBTUSD longs have paid shorts a total of 34.75%.

https://blog.bitmex.com/xbtusd-the-p...-synthetic-usd

https://www.bitmex.com/app/fundingHistory?start=0

Thank you for mentioning it here yg10. I've been looking at a way how to monetize it, but I concluded it is not so lucrative job to do. Let's have a look at a few examples at bitmex. Below are the contango/backwardation plots for XRP contracts with 3 months delivery period. My interpretation is that the size of contango (which is needed for spot buying BTC and simultaneously future selling) is diminishing, which means at contract 2018-06-29 you could cash in 15%, but at contract 2018-12-28 you could lock in profit of something around 5%. And it is not even those 15% nor 5% because you need to spread your capital (assuming no leverage effect), you would have to have half of your capital somewhere buying BTC spot and half of your capital at BitMex. Thus, from the 5% above, it would be roughly 2.5% in 3 months. Going even further and thinking about trading this with "big money", it is likely our average fill price would make this business less profitable than keeping money at our saving account.



Cheers, and hope it helps.

Thanks for posting the links to BitMex website which nicely summarize the motivation behind the conducted research. The Funding Rates in a simple chart are at the medium detailed research post (link above).

The "biasedness" of the funding rate is even more clearly visible on ETHUSD contracts.