Conventional money making routes are often highly saturated and predictably ineffective.
When it comes to the world of cryptocurrency and blockchain, it's mostly high risk and competitive.
For instance, the single most profitable way to make money in crypto is to trade perpetual contracts, sometimes referred to as futures.
Conventionally, that means either longing or shorting perpetual contracts made available by exchanges.
The problem with this however is that it has insanely high risks due to being a free market with a large number of participants. Volatility is high and said levels of price swings can wipe out your entire net worth within seconds, if you're a degenerate and gambled it all on one trade.
But who's beyond the temptation of waking up $1,000 rich and excited to 100x it on a seven day window? Surely I am being very unrealistic with the specified window as most people hope to achieve that in a day as we all begin to punch our calculators to find out how we can displace Elon Musk as the richest person within a year.
The biggest bragging points here would be that our wealth would be highly liquid.
Comical no?
Yes it is, but this widely shared expectation is also why it never happens.
Very few make it big on conventional approaches, so what's the non-conventional way around it?
22% Yield on Bitcoin Via Perps
First off, it's not static yield, meaning that it is guaranteed, but it's low risk and sustainable, especially when done right. Yield amount will also vary across exchanges.
The single biggest downside is that it only allows for one direction trading and has a higher upside potential for profitability at peak market levels.
The one direction here means you have to buy the asset on spot and short the same asset on perpetual.
So what's this yield and where is it coming from?
Most importantly, how is it low risk?
To answer that simply, the yield comes from funding rates(fees) and trade practice is essentially active arbitrage that requires holding both spot and perpetual positions overtime.
Funding rate is basically a fee active position holders pay to maintain price uniformity between the perpetual contract market price and the underlying spot price. This fee is usually collected every 4 hours and is paid by either long or short position holders depending on if the Perps price is higher or lower than the spot price.
If the funding rate is positive, which means that the Perps price is higher than the spot price, the fee will be charged to long position holders and the rate is determined by the price deviation. If the reverse is the case, then shorts will pay to longs.
That said, arbitrage is simply trading the price difference in an asset across different markets, which in this case is between spot and perpetual.
Given that perpetual contracts do not expire and will remain active so long as the liquidation price is not hit, it presents an opportunity for active position holders to earn some sort of yield from funding fees collected overtime.
To see the potential here, let's look at some data. Keep in mind that 22% APR means an annual return and your closing profit will only be as big as your position size, overtime.
Quick disclaimer: this is not financial advice.
When we look at data from Coinglass, the accumulated bitcoin funding rate for the last year was 11.7243% on Binance, 11.2471% on Bybit and 22.2730% on dYdX. The last exchange is where the yield specified in this post is derived.
It is important to note that dYdX is a fairly new decentralized exchange, meaning that trades are generally managed by a smart contract, autonomously and there's not a centralized party risk but there remains smart contract risks and other attacks, so a proper research is important before using the platform, otherwise, sticking with a lower yield around 11% with any trusted centralized exchange is just OK.
Moving forward, what this data suggests is that over the last 365 days, BTC short positions earned approximately 22% APR, provided they remained active throughout the year.
Surely, any sane person would wonder how it will be possible to hold a position that long without getting liquidated, especially a short position in a bull market.
Well, that's a good line of thought and it is the reason we need to hold a spot position, which is what makes this entire trade practice low risk.
To manage risk and earn the yield, our perpetual position leverage has to be at the lowest it can be and our spot position size has to always be equal to perp margin × leverage.
This means that if our margin(capital) is $1,000 on perpetual and our leverage is 5x, then we have to buy Bitcoin worth $5,000 on spot.
What we are doing here is hedging. If the market pumps 20% at any time throughout the year, from our initial entry, our perp position will be liquidated but our holdings on spot will be 20% in profit, essentially covering the loss on perp.
The positions are generally set up to chase the yield from funding fees, however, a major price swing in either market does not hurt us financially but can potentially get us in positions to earn more, if we can catch it in action.
But of course, this is all theoretical. In practice, your positions will require a lot of monitoring, it might even help to set up the strategy through automated software for efficiency.
But the bottomline is that both positions are hedged and price differences become yield for your position.
It is important to note that if funding turns negative, your short position pays the fees, this is why monitoring is important, but it is also unlikely because in a bull market, I'm tempted to speculate that there's always more FOMO longs despite the greedy bears shorting the market and this will push the perp market up, higher than the spot value, in most cases.
The goal generally is to be on the positive end annually.