Trading Rates: Why and How
Rho is bringing rate trading to crypto, opening up a new market that goes beyond trading tokens themselves. Traders can now take positions on new market movers, such as funding rates and liquidity costs.
Imagine funding rates surging beyond 100% annualized in euphoric conditions or dipping sharply negative in bearish cycles. These dramatic swings create major opportunities for traders who know how to take advantage of them. But with big moves come big risks—making rate derivatives essential for both capturing upside and managing risk.
Rho gives traders the chance to be early in a new asset class that will define the future of crypto.
Two Key Reasons to Trade Rates
Increase returns
Rate trading gives traders an edge. Whether it's funding rates surging during market hype or staking yields reacting to changing network dynamics, traders can position themselves to capture these moves. With instruments like futures providing leverage, traders can amplify returns and boost capital efficiency.
Protect profits
Sudden spikes in funding rates can quickly eat into profits or drive up holding costs. Rate derivatives let traders hedge against these unexpected moves, preserving gains and protecting capital when volatility strikes.
Example of Profitable Long Rates Trade
In early November 2024, ETH funding rates hovered below 11% as traders nervously awaited the U.S. election results. A Trump victory offered significant upside given his crypto-friendly stance, while even a Democrat win promised opportunities due to central bank easing, reduced uncertainty, and seasonal liquidity crunches that typically push December funding rates higher.
Funding rates rarely stay below 5% for long. In December 2023, they spiked as high as 30%, driven by thin institutional liquidity and degen hype—reinforcing the case for asymmetric upside.
An opportunistic trade emerged: a long position in ETH funding rate futures expiring December 27 at around 9%.
Immediately after the election, ETH funding rates surged beyond 50%, averaging 26% throughout November.
The trader closed the position early on November 25 at a futures rate of 20%, locking in a 97% return in just 21 days using 50x leverage.
How Does This Compare to Other Forms of Trading?
ETH’s spot price rallied ~50% from early to late November. A spot holder would have earned solid returns—but even on this extremely successful trade, the payoff was lower than the 97% return from the rates trade.
Perpetual futures could amplify returns with leverage, but at a cost:
Even at a modest 10x, the position carries a much higher liquidation risk. Moreover, with a 26% average funding rate, the trade would incur ~2% in costs over the period.
Call options offer attractive risk-reward profile—but premiums are often expensive, especially in crypto’s high-volatility environment, making breakevens harder to achieve
Rate futures, by contrast, delivered a 97% return in 21 days with no ETH price exposure, lower risk, and clearer asymmetry—even at 50x leverage. Liquidation risk was minimal: funding rates would have needed to drop below 4% and stay there for the position to be wiped out—a highly unlikely scenario given the macro backdrop at the time.
Example of Hedging Scenario
Without Rates Hedge
Suppose a trader opens a long BTC perpetual position with expectations of a bullish market. If the trader holds a $100,000 position and funding rates increase to 25% annualized, the cost over a 2-month period would amount to approximately $4,167 (or 4.2% of the position size). This significant expense directly impacts profitability and underscores the importance of managing funding rate exposure. Funding rates jumped dramatically from an annualized 5% to 25%, significantly raising daily holding costs and creating unexpected financial stress.
With Rates Hedge
Now, consider the same scenario where the trader, anticipating possible volatility in funding rates, simultaneously opens a long funding futures position. By doing so, the trader effectively offsets the increase in costs resulting from the spike. If the trader hedges at 7% on Rho, the effective funding cost is reduced, saving approximately $3,000 over 2 months, mitigating a large portion of the $4,167 funding expense incurred at a 25% funding rate. The hedge stabilizes the overall position, significantly reducing huge rate changes and protecting profitability.
More importantly, the hedge (long funding futures) requires as few as $2,000 in collateral (50x leverage).
This clearly demonstrates the importance and effectiveness of hedging rate risks.
Conclusion
As demonstrated above, trading rates provide traders with higher return opportunities and better risk protection compared to traditional trading strategies. In the long trade scenario, the trader managed to achieve a strong return with less much less risk compared to a spot or perp trade, highlighting rate trading’s efficiency in maximizing risk-rewards.
Meanwhile, in the hedging scenario, traders were able to protect a good portion of their PnL by making a simple rate hedge, shielding themselves from unexpected funding rate spikes.
Ultimately, rate trading is not just about capital efficiency—it’s a superior way to maximize profits and mitigate risk.
