Today, we dive deep into cash-and-carry trading, the funding rate, and how you can use Kwenta to make the most of these opportunities.
Cash-and-carry trading is a strategy that involves simultaneously buying an asset in the spot market while short-selling an equivalent asset in the futures market. The aim is to take advantage of the price difference between the two markets to generate a profit.
Here's how it works:
We take a long position in a token in the spot market.
Simultaneously, we short the associated perpetual contract.
This means we're delta-neutral, so small changes in the asset's price won't affect us.
The Funding Rate
Now, let’s talk about the funding rate.
Funding rate is a recurring payment based on the difference between perpetual contracts and spot prices.
Think of it as a fee or a rebate for traders to hold their position.
It's determined by the skew of the derivative and how much it deviates from the spot market and accounts for factors such as interest rates and market demand.
When the perpetual contract trades at a premium, it means the skew is positive.
Conversely, when it's at a discount, the skew is negative.
Identifying Profitable Trades
Successful cash-and-carry trading relies on identifying profitable trades means looking for situations where the futures market is trading at a premium or a discount to the spot market.
Look for pricing discrepancies between spot and futures markets.
When the spot price is lower than the futures price, it's a cash-and-carry opportunity.
Buy the asset at the lower spot price and short the perpetual contract at the higher futures price.
This way, you profit from the price difference and the funding rate.
To do this effectively, you need access to up-to-date market data and monitoring tools.
A Real-Life Example
Let's understand it with an example.
Bitcoin is currently trading at $45,000 on Kwenta and $45,200 on a different exchange.
The funding rate for BTC-PERP on Kwenta is positive at 0.015432%, meaning long positions pay short positions.
We buy $20,000 worth of spot Bitcoin and short the equivalent on Kwenta.
Leveraging Kwenta's 4x leverage, we initiate the trade with an initial deposit of just $5,000.
The total fees for this trade amount to $75, covering opening and closing costs.
Considering we are making a profit of $45 daily, we reach the break-even point in less than 2 days.
So, not only do we earn from the price difference but also profit from the premium/discount on Kwenta.
Risks and Considerations
As with any strategy, there are risks to cash-and-carry trading.
Execution at desired prices, especially for larger positions can be challenging if there is limited liquidity.
Remember, you expose yourself to funding rate fluctuations, which can affect profitability. The funding rate is not fixed and can change,
If the funding rate turns negative, it means that short positions pay long positions, which can erode your potential profits or lead to losses.
Now that we understand the strategy, let's talk about Kwenta.
Kwenta is the crypto perpetual contract platform that runs on Optimism and is powered by Synthetix Perps.
It offers a wide range of perpetual contracts with some advanced trading features including smart margin and hybrid on-chain/off-chain conditional order system.
It offers efficient & low trading fees.
Plus, traders earn Kwenta through the fee rebate system.
There you have it, folks!
Cash-and-carry trading can be a profitable strategy in the crypto market, especially when using Kwenta. But remember, it comes with risks, so do your research and stay vigilant.
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The information provided through this work is intended solely for educational purposes and must not be treated as investment advice. Any lapses in presenting any of the information correctly are ours alone. We disclaim any liability associated with the use of this content.
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