Perpetual futures have become a go-to instrument for many crypto traders looking to capitalize on market movements in this fast-paced space. 

However, the volatile nature of funding rates can significantly impact the profitability of traders’ positions. In December 2023, bullish sentiment driven by the approval of Bitcoin ETFs, has sent perp funding rates soaring up to 65% APR, that’s 0.0597% every 8 hours!

For a long perp position holder, these payments would be deducted directly from the PnL, creating a restrictively high hurdle rate to trading profitably. Funding volatility is a major risk to smart traders’ PnL and cannot be ignored. Smart traders, therefore, need better tools to help manage the risks and complexities specific to the perpetuals market.

In this article, we'll explore how Rho Protocol's innovative funding rate futures can help you hedge your perpetuals positions, and help protect you from funding volatility.

The Funding Rate Risk

Perpetual futures contracts are subject to frequent funding payments, determined by the difference between the contract's price and the underlying asset's spot price. 

When the perpetual futures price is higher than the spot price, long position holders pay short position holders a funding fee, and vice versa.

In quiet markets, the funding rates on major exchanges hover around 0.01% every 8 hours, equivalent to 10.95% per annum. However, funding can fluctuate dramatically, reflecting the crypto market volatility. Funding spikes are a source of variance which can eat into profits or even turn winning trades into losses.

Rho Protocol's Solution

Enter stage left: Rho is set to bring you futures for perp funding rates.

What is in it for you? 

For the first time in crypto, Rho’s instruments allow you to hedge your perpetual futures positions against the impact of funding rate fluctuations. In a nutshell, with the right hedging strategy, you can trade perps funding risk-free!

You can also take a position against the rate according to your own market predictions without the underlying spot asset price risk. For example, the value of your position in a BTC funding rate future on Rho, will only depend on the fluctuation of the underlying rate without direct impact from the price of BTC.

How is this better?

Buying or selling Rho’s funding rate futures can effectively neutralize the impact of funding rate fluctuations on your overall profitability.

By trading the rate without the underlying asset price risk, you can achieve much higher capital efficiency. You will need far less collateral for the same notional amount than for your typical crypto-perpetual trading.

Hedging in Action

Example of Hedging Strategy Using Rho Protocol 

Let’s illustrate how this hedging strategy works using a practical example.  

Suppose you currently hold a long position of 10,000 USDT in a perpetual futures contract on Binance, with a funding rate of 0.01% every 8 hours. You intend to hold a position for a month.

Concerned about potential increases in this rate that could diminish your profits, you decide to enter a hedging position by buying an equivalent 10,000 USDT in Rho funding rate futures. This position, expiring in a month, locks in a fixed funding rate of 0.01% every 8 hours. 

Let’s imagine a scenario in which funding rates have doubled to 0.02% every 8 hours (all values paid by you are shown as “-” negative, while values received by are “+” positive).

Hedge Setup

Binance Position: 

Position Direction/Size: Long 10,000 USDT

Initial Funding Rate: -0.010% every 8 hours 

Current Funding Rate: -0.020% every 8 hours

Daily Funding Payments: (-0.020% ×3 ) × 10,000 USDT = -6.00 USDT paid per day 

Rho Protocol Derivative Position:

Position Direction/Size: Long 10,000 USDT 

Locked-In Rate: 0.010% every 8 hours 

Daily Funding Payments*: (+0.020% −0.010%) × 3 × 10,000 USDT = +3.00 USDT received per day  

*Calculated as a difference between the locked-in rate and the current funding rate on Binance

Resulting Funding PnL

-6.00 USDT (Binance Funding) + 3.00 USDT (Rho PnL) = -3.00 USDT per day. This is equivalent to 0.01% funding payment per 8 hours locked in initially.

Total Savings Over 1 Month: 3.00 USDT × 30 days = 90 USDT. This is the equivalent of an extra 10.95% annualized return!

By offsetting the increased funding payments on Binance by an equivalent income stream on Rho, the trader maintained a total funding exposure fixed at 0.10% every 8 hours despite the market spike. 

Whether Hedge or Edge, Rho Has the Tools You Need

Funding rate fluctuations can be a significant source of risk for perpetual futures traders. By using Rho Protocol's funding rate derivatives, you can protect your profits, trade with greater confidence, or take a position against the market whenever you feel you have an edge. 

Whether you're a private trader or a fund manager, this powerful risk management tool is a must-have in your trading arsenal. 
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