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Funding rate arbitrage: how cash-and-carry trades work

Funding rate arbitrage — often called a cash-and-carry trade — is how some traders try to turn the funding rate mechanism from a background cost into a source of income, without taking a directional bet on price.

The core idea

The trade has two legs, opened at the same time and sized equally:

• Leg 1 — buy spot. Buy the coin on the spot market and hold it.
• Leg 2 — short the perpetual. Open a short position of the same notional size in that coin's perpetual futures.

If price goes up, the spot position gains and the short perpetual loses — roughly canceling out. If price goes down, the spot position loses and the short perpetual gains — again roughly canceling out. Because the two legs move in opposite directions by similar amounts, the trade's exposure to price direction is close to neutral. What's left over is the funding rate: when the rate is positive, longs pay shorts, and this trade is holding the short leg — so it collects that payment every funding interval, as explained in our funding rate guide.

Why the opportunity exists

Perpetual futures often trade at a premium to spot when the market is broadly bullish and more traders want long exposure through leverage than short exposure — pushing the perpetual price above the spot price. The funding mechanism exists specifically to correct that gap, by charging longs and paying shorts. A cash-and-carry trader is, in effect, providing the short-side liquidity the market needs to keep the perpetual anchored to spot, and getting paid the funding rate for supplying it.

Where the real risk sits

"Market-neutral" describes the trade's exposure to price direction — it does not mean risk-free. The actual risks are real and worth naming plainly:

• Funding can flip negative. If sentiment shifts and shorts start paying longs instead, this trade starts paying out rather than collecting — and rates can flip faster than a position can be unwound cleanly.
• The two legs aren't perfectly matched in practice. Spot and perpetual prices can diverge briefly (basis risk), and closing both legs at exactly the same moment isn't guaranteed, especially in fast markets.
• Margin and liquidation risk on the futures leg. The short perpetual leg typically runs on margin. A sharp price spike can put that leg under margin pressure even though the spot leg is gaining — a timing mismatch (margin calls happen faster than spot gains can be realized and moved over) that has caught traders out before.
• Exchange and counterparty risk. Holding assets and open positions on an exchange carries the exchange's own operational and counterparty risk, on top of the trade's market risk.
• Fees eat into thin margins. Funding rates are usually small; trading fees on both legs, especially if the position is opened and closed repeatedly, can offset a meaningful share of what funding pays.

A simplified example

Say you buy $10,000 of ETH on spot and simultaneously short $10,000 of ETH perpetual futures, with the funding rate sitting at +0.01% per 8-hour period. Ignoring fees and any price divergence between the legs, you'd collect roughly $1 every 8 hours, or about $3/day — around $90/month — as long as the rate stays positive and the position stays open, regardless of which way ETH's price actually moves. You can plug these numbers into our funding cost calculator to model the funding leg with a live rate for any pair.

Key takeaway

Funding rate arbitrage collects the funding rate by holding offsetting spot and perpetual positions, which cancels out most of the price risk but leaves execution, margin, and funding-direction risk in place. It's a strategy built around a real market mechanism, not a guaranteed yield — treat any funding number you see as a snapshot of today's rate, not a promised return.