Undervalued Opportunities in the Crypto Market: Funding Rates Can Be Traded Separately

The cash flow in the existing crypto market includes a set of potential markets.

Written by: @thenarrator

Compiled by: AididiaoJP, Foresight News

Almost every crypto trade hides another trade.

Some buy ETH exposure through perpetual contracts while also taking on the risk of funding rates. Some borrow against collateral while also accepting the risk of interest rate fluctuations. Some conduct business around trading activities, with income tied to the fees generated by these activities.

The first type of exposure is usually the reason they enter the market. The second is a byproduct.

This distinction leads to an interesting thought experiment: what happens when risks that people originally accept as participation costs become something that can be traded separately?

Traders can be bullish on ETH but do not want to bear an unpredictable funding fee bill. Borrowers may want capital but do not want to endure the uncertainty of costs. In both cases, there are things they want to retain and things they are willing to pay to shed.

Being able to stand on the other side of this uncertainty could be one of the most undervalued assets in the crypto world.

Imagine a trader holding $100,000 in ETH exposure, believing that ETH will rise. The funding rate is another variable that affects the economics of this position. It could become very expensive while their original judgment remains valid.

Closing the position can solve the funding fee issue, but it also removes the desired exposure. The same goes for reducing the position, just on a smaller scale. If there were a way to claim funding costs independently, it would create another possibility: to retain price exposure while offsetting some of the costs of maintaining it.

At this point, a regular bill starts to resemble a financial market instrument.

Envision a contract that covers a fixed 30-day window. Each unit corresponds to $1,000 in exposure. If the cumulative funding fee exceeds a pre-agreed threshold, it compensates for the excess cost based on the reference amount, up to a limit.

A $10,000 position might use 10 units, while a $100,000 position would use 100 units. Everyone trades under the same set of rules, just with different quantities.

Mathematically, it’s not complex. The interesting part of the structure is that the buyer does not necessarily have a funding fee bill.

One person buys because an increase in funding fees would harm their existing position. Another buys because they believe the contract undervalues the amount it might pay out. The seller stands on the other side because the premium looks attractive relative to the obligations they are taking on.

Different motivations ultimately converge on the same claim.

This is a useful connection between prediction markets and hedging. The market can express divergences about the future while serving those who already have stakes in it. Hedgers come with existing exposures, while traders come with price views. To want the same payout, orders can meet in the same market.

But once protection is involved, the shape of the payout becomes much more important.

A binary contract that pays $100 when the funding fee crosses the threshold treats small breaches and extreme spikes equally. As a contract, this is entirely coherent. Whether it is useful for hedging depends on whether the $100 is close to the actual costs faced by the holder.

For variable costs, the probability of crossing the threshold tells only part of the story. The severity determines how painful it is once the threshold is crossed.

Payouts that grow with excess funding fees capture another part of the exposure. The cap limits the seller's obligations. A fixed observation window provides both parties with a clear measurement period. These choices determine what risks are actually transferred.

Calling the product "protection" does not establish this relationship. The payout structure must match this claim.

Standardized contracts encounter difficulties when they meet real positions.

Two traders may hold the same $100,000 ETH exposure, but their costs may differ. One holds a fixed amount of ETH, with the dollar nominal value changing with price. The other adjusts their position to keep the dollar amount roughly constant. A third may exit midway.

Positions change, while contracts follow fixed rules established at issuance.

The resulting mismatch creates basis risk. Payouts may be less than losses, greater than losses, or may not pay out at all when the holder incurs costs. Matching the initial nominal amount helps, but does not make the exposures perfectly aligned.

This creates a tension at the core of design: highly personalized contracts can be closer to one client but are harder to trade alongside others; standardized contracts give participants something to buy and sell in common but leave individual differences outside.

More contract variants can improve matching but will scatter buyers and sellers into smaller markets.

Useful units lie within this trade-off: a risk is shared closely enough by enough people that, despite mismatches, a common contract still holds value.

Timing adds another dimension. Funding fee costs may erode available collateral throughout the month, while protection may not pay out until the end of the month. Even if it ultimately offsets costs, the payout may come too late to prevent earlier cash shortages.

The final amount and the timing of payouts are two distinct attributes of hedging.

This distinction also explains why protection against funding fees does not automatically equate to protection against liquidation. The underlying position still carries price risk, collateral requirements, and its own cash flow arrangements. A claim held elsewhere may not help fulfill obligations when they come due.

On the other side of the contract are the same specific issues: someone must be able to pay out.

It could be another participant or a pool of committed capital. In either case, the premium is compensation for taking on uncertain liabilities. Claims will reduce returns. Multiple claims may arrive simultaneously. Funds set aside for unfulfilled commitments cannot simultaneously be treated as freely withdrawable capital.

Returns come from successfully bearing this obligation over the long term.

Risk-bearing capacity becomes more precise here: it is the capital available under terms that make protection useful, including when adverse outcomes occur. Its value depends on the commitments attached to it, the risks concentrated within, and the price charged for providing that capacity.

Looking solely at a large capital pool does not explain these attributes.

Nor does it guarantee that existing contracts can be sold. Assets reserved for settlement answer "can it pay out?" Secondary liquidity answers "before that, is anyone willing to buy, at what price?" A market can solve one problem but leave another.

Here, several familiar disciplines converge. Prediction markets provide a way to trade views on outcomes. Derivatives offer different payout structures. Actuarial mathematics describes losses and the capital needed to absorb them. Market microstructure determines whether participants can enter and exit at useful prices.

The opportunity lies in how these components can be pieced together around a cost that people already understand.

Funding fee bills are concrete. Borrowing costs are too. Clients do not need to form views on new financial instruments beforehand. They need to understand what might become expensive, what the contract will pay, and what remains their responsibility.

Economic testing is equally concrete. When these answers can align with each other, the market can endure.

Viewed this way, the cash flow in the existing crypto market contains a set of potential markets. Each position carries costs, dependencies, and uncertainties beyond the screen price. Some are too personalized to standardize. Others may be shared widely enough to become independent contracts.

The ability to absorb these uncertainties is valuable because others have reasons to transfer them away.

Making this ability measurable, financeable, and tradable is the interesting possibility.

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