Why Is a Highly Negative Funding Rate Also an Arbitrage Opportunity?
A highly negative funding rate signals a significant discount (backwardation) and means short holders are paying long holders. Arbitrageurs can exploit this by taking a long position in the perpetual contract and simultaneously shorting the equivalent amount of the underlying asset in the spot market.
They profit by collecting the high negative funding rate payments while their net market exposure is hedged.
Glossar
High Negative Funding Rate
Rate ⎊ A high negative funding rate indicates that short position holders are paying long position holders a significant premium in a perpetual futures contract.
Negative Funding Rate Signals
Sentiment ⎊ Negative funding rate signals indicate a bearish market sentiment, where short positions are dominant over long positions in perpetual futures contracts.
Highly Negative Funding Rate
Rate ⎊ A highly negative funding rate within cryptocurrency perpetual futures contracts signifies a substantial cost for holders of long positions, effectively incentivizing traders to reduce net long exposure.