macrocephalopod

Here’s my take on this, because I think it’s way simpler than this thread makes out. The question is “why do ETHUSD perpetuals on bitmex trade at a premium to spot ETHUSD”?https://twitter.com/SBF_FTX/status/1403832569037135872 …

It’s because bitmex ETHUSD is a *quanto swap* — financial lingo for a contract that pays out in a different currency to the one it references. In this case the referenced rate is ETHUSD but the contract pays out in BTC.

Crucially ETHUSD is positively correlated with BTCUSD, so if ETHUSD is up, then the value of BTC (as measured in USD) is also likely to be up.

So when you make money on the perpetual, you get pnl in an asset whose value is up. When you lose money on the perpetual, your losses are denominated in an asset whose value is down. So you get more on your gains and lose less on your losses.

That’s a win-win which needs to be paid for somehow — and they way you pay for it is with a higher funding rate. The increase in funding rate will be proportional to the volatility of both BTC and ETH, and proportional to the BTC-ETH correlation.

All those numbers are high, so the required increase in the funding rate to offset the benefits is also very high — the funding rate is typically around 100% annualised, compared to 10-20% annualised for the non-quanto ETHUSD contract on other exchanges.