Read the story here. Advertise at Before It's News here.
Profile image
By FalkenBlog (Reporter)
Contributor profile | More stories
Story Views
Last hour:
Last 24 hours:

BitMex's ETHUSD Funding Rate Anomaly

% of readers think this story is Fact. Add your two cents.

 The average funding rate paid by long ETH swap holders has been 63% annualized since it started trading in August 2018, considerably higher than BitMex’s BTC swap rate of 6%. You can go long ETH, short the BitMEX ETH perpetual swap, and make 63% annualized on a flat book. You might need 20% down on your perp, so 63% divided by 1.2, but that’s still a nice risk-free return.

Actually, that doesn’t work for anyone interested in their USD return. This funding rate anomaly is just the result of the parochial pricing algorithm, which generates a convoluted payout.

BitMex’s large ETH swap funding rate results from the fact that payments are denominated in BTC, which is highly correlated with ETH. Adjusting the funding rate for the positive BTC~ETH covariance adds convexity to the long ETHUSD swap return. The swap funding rate for ETH adjusts for this, leaving a net funding rate near zero. BitMEX makes enough money via standard trading and liquidations, so they explicitly direct their market makers to break even over time.

The ETHUSD funding rate is like the convexity adjustment in Eurodollar futures needed to compare them with Eurodollar interest rate swap rates. In the case of futures vs. swaps, the subtle difference comes from the fact that the futures pay out their pnl each quarter while the swaps accrue it, and the payout is correlated with interest rates that accrue on that pnl. Similarly, when the long ETH position pays off bitcoin, the value of that bitcoin will tend to be higher. The Eurodollar futures-swap convexity adjustment became well-publicized in the mid-90s, but for a good five years, several large players made millions on this arbitrage (you could not make money off it without institutional access to cross margin). As Eurodollars are one of the largest markets in the world, it is understandable that a large market like the ETHUSD could also miss this adjustment.

BTC Swap Payoff

Let us first look at the profit generated by the asset price for a perp without this adjustment, the BTC perp. The long USD profit is generated in BTC as follows for an entry price at time t, and  exit at t+1:

[BitMex uses the XBT for BTC. Whatevs]. As you are getting paid in BTC, and the above payoff is in USD, you need to make the final adjustment of this into BTC, so you add this final price to the payoff function to put it into the return people care about:

which implies the inverted perp payoff:

Note the backward ordering of the prices, contrary to the standard case. This is because the BTC notional amount is in USD, and we have to ultimately translate that back into BTC. It looks funny but is quite straightforward in its effect. Actually, admirably clever.

ETH Swap Payoff

The BitMEX ETH swap payoff is a notional amount times the change in the USD ETH price:

This generates a BTC-denominated payoff, however, and most people care about USD. To translate into USD, we must first take USD notional and turn it into bitcoin at time t, then turn the payoff back into USD at time t+1. The round trip starts and, ends in USD

Rearranging we get

Or using net returns:

This is the return that investors care about, not the bitcoin return. If we put this into simple net USD returns we get

As the expected value of E(x*y) = covariance of x and y, we can restate this as

If we substitute the covariance using correlation and volatility metrics for ETH and XBT, we get:

Since August 2018, the annualized volatility for BTC and ETH has been 78% and 103%, respectively, with a correlation of 83%, generating a covariance adjustment that annualizes out to be about 63%. The annualized return premium of the BitMex ETH swap compared to the ETH USD return over that period: 83% vs. 149%, a difference of 66%.

BitMex returns


Interestingly, the average funding rate over this period was around 63%. This implies an average ETH perp premium of negative 3%, basically zero. A short ETHUSD position hedged against a long ETH position would have lost 66% in USD terms due to the convexity generated by the ETH~BTC covariance. The high funding rate for this product is an equilibrium rate that offsets this convexity adjustment, generating no arbitrage opportunity.


Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Humic & Fulvic Liquid Trace Mineral Complex

HerbAnomic’s Humic and Fulvic Liquid Trace Mineral Complex is a revolutionary New Humic and Fulvic Acid Complex designed to support your body at the cellular level. Our product has been thoroughly tested by an ISO/IEC Certified Lab for toxins and Heavy metals as well as for trace mineral content. We KNOW we have NO lead, arsenic, mercury, aluminum etc. in our Formula. This Humic & Fulvic Liquid Trace Mineral complex has high trace levels of naturally occurring Humic and Fulvic Acids as well as high trace levels of Zinc, Iron, Magnesium, Molybdenum, Potassium and more. There is a wide range of up to 70 trace minerals which occur naturally in our Complex at varying levels. We Choose to list the 8 substances which occur in higher trace levels on our supplement panel. We don’t claim a high number of minerals as other Humic and Fulvic Supplements do and leave you to guess which elements you’ll be getting. Order Your Humic Fulvic for Your Family by Clicking on this Link , or the Banner Below.

Our Formula is an exceptional value compared to other Humic Fulvic Minerals because...


It Always Tests at 9.5+ pH

Preservative and Chemical Free

Allergen Free

Comes From a Pure, Unpolluted, Organic Source

Is an Excellent Source for Trace Minerals

Is From Whole, Prehisoric Plant Based Origin Material With Ionic Minerals and Constituents

Highly Conductive/Full of Extra Electrons

Is a Full Spectrum Complex

Our Humic and Fulvic Liquid Trace Mineral Complex has Minerals, Amino Acids, Poly Electrolytes, Phytochemicals, Polyphenols, Bioflavonoids and Trace Vitamins included with the Humic and Fulvic Acid. Our Source material is high in these constituents, where other manufacturers use inferior materials.

Try Our Humic and Fulvic Liquid Trace Mineral Complex today. Order Yours Today by Following This Link.

Report abuse


    Your Comments
    Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

    Load more ...




    Email this story
    Email this story

    If you really want to ban this commenter, please write down the reason:

    If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.