macrocephalopod

@macrocephalopod should I be using simple annualisation here or CAGR?

Good question that doesn't actually have a simple answer! Perps are easiest. You are long spot (say BTC) and short futs. For inverse you receive funding payments in BTC so to maintain zero delta you either need to sell small amounts of BTC or sell more futures.

If you are selling spot then your exposure stays the same and you should use simple annualization. If you sell futures your exposure grows and you should use CAGR.

For linear futures you receive your funding payments in USD so by default your exposure stays the same (simple annualization) but if you used the USD to increase your position size you should use CAGR.

For dated futures you can only guarantee positive P&L if you hold to expiry, so your compounding opportunities are limited to once/month or once/quarter. So either simple annualization, or (1+x)^12 (monthly) or (1+x)^4 (qtrly) depending on whether you compound or not.

To err on the side of caution I would just use simple annualization everywhere since it applies to every type of contract, requires the least action on the part of the trader, and is more easily understood.

The system I set up to track premiums uses simple annualization everywhere for this reason. Compounding 8 hour interest to annual is useful primarily for generating eye-popping numbers when you need to impress someone.

Thank you for breaking it down into simple terms. As we're on the topic of collecting funding from perps, would you consider the theoretical risk-free rate for cryptoassets to be the flat funding (0.01%) collected every 8 hours or 10.95% via simple annualisation?