Smart Money Eyes Market-Neutral Trades as ADA, AXS See Unusually Low Funding Rates

Traders can purchase ADA perpetual contracts and simultaneously sell ADA tokens in the spot market to safely pocket the funding rate, one expert said.

AccessTimeIconOct 21, 2022 at 2:07 p.m. UTC
Updated Oct 21, 2022 at 4:45 p.m. UTC

While you continue to fret over the broader market lull, remember there are always opportunities out there and they often present themselves in different ways.

For instance, holding a short position (a bearish bet) in the perpetual futures market tied to Cardano's ADA and play-to-earn giant Axie Infinity's AXS token has become unusually costly, creating a window of opportunity for market-neutral traders to make attractive returns, according to Markus Thielen, head of research at strategy at Matrixport, a crypto services provider with $10 billion in assets under management.

In a note sent to clients early Friday, Thielen said ADA's annualized funding rate, or the cost of keeping long (bullish)/short (bearish) positions open, has dropped to an average of -14% across major exchanges – a rare occurrence in the past eight months. As a result, traders can purchase ADA perpetual contracts and simultaneously sell ADA tokens in the spot market to safely pocket the funding rate.

The funding rate is charged every eight hours. A negative rate, as in ADA's case, means positioning is skewed bearish and short sellers are paying longs to keep short positions open.

This chart shows perpetual funding rates for major cryptocurrencies. (Matrixport)
This chart shows perpetual funding rates for major cryptocurrencies. (Matrixport)

So, suppose an entity opens a long position in the ADA perpetual futures market right now. In that case, it will receive an annualized funding rate of 14% – an attractive yield, considering the U.S. 10-year Treasury note yields just over 4%.

The long trade, however, is unhedged. If ADA's price tanks, the resulting loss could be more significant than the 14% yield generated from the funding rate. The entity can eliminate the risk by selling ADA tokens in the spot market, thereby creating a market-neutral position.

"Long ADA Perp at -14% to -23% discount vs. Short Cardano's ADA spot Tokens," Thielen recommended in a client note.

"You can currently make 14% profit by purchasing perpetual future, borrowing the ADA tokens from a firm like Matrixport, and selling those. If and when the spot price and perpetual futures converge, you should make a 14% profit return," Thielen told CoinDesk.

Note that the rate at which tokens are borrowed needs to be lower than the funding yield, or else the market-neutral strategy will yield a loss.

ADA traded at 35 cents at press time, down 2% on the day. The token has lost over 20% since Cardano implemented the Vasil hard fork on Sep 26, seeking to boost security, scalability and transaction speeds.

AXS funding rate drops to -56%

The bear grip around AXS has strengthened, pushing the funding rate to a whopping -56%, as 10 million tokens belonging to insiders and early investors will be released into the market soon.

A market-neutral strategy of buying AXS perpetual contracts and selling borrowed AXS tokens will earn an annualized return of 56% (excluding the cost of borrowing AXS tokens).

According to Thielen, the token unlock could happen next week.

"While the exact date is determined by the transaction block number, by some estimates, the vesting period ends approximately around Oct. 24-26," Thielen said.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.