The Tether Funding Trade: Collect Yield or Bet on a Depeg

TL;DR

There's a trade on BitMEX that pays a delta-neutral yield of roughly up to 43% a year; the same structure could also turn into a cheap bet that pays off big if Tether ever loses its $1 peg.

Both come from one gap: the difference in funding (the “cost to hold”) between BitMEX's two Bitcoin perpetuals – XBTUSD (margined in Bitcoin) and XBTUSDT (margined in Tether). They track the same Bitcoin price, but the two charge different fundings, and that difference makes up the whole trade:

Trade 1 – Farm the Yield: Collect the funding difference between the two contracts. It's market-neutral (you don't care whether Bitcoin goes up or down) and has paid about 4% a year with no leverage, or ~13% at 10× leverage. The catch: this position quietly leaves you holding Tether, so you lose if Tether ever breaks its peg.

Trade 2 – Bet on a Depeg: Do the exact opposite. You pay that small funding difference as a running cost, and in return you get paid a lot if Tether ever falls below $1. Your loss is capped at the small cost but your payout is not.

Recap: XBTUSD <> XBTUSDT

BitMEX offers two distinct Bitcoin perpetuals, each serving a different trading crowd. The divergence in their funding rates creates the trading opportunities we've explored:

XBTUSD (Inverse): Margined in Bitcoin, PnL is in Bitcoin. Favored by long-term holders and hedgers who want pure Bitcoin exposure without the stablecoin risk.

XBTUSDT (Linear): Margined in Tether, PnL is in Tether. The industry-standard format favored by stablecoin traders who tend to lean long.

While both track the same Bitcoin spot price, they maintain separate order books and funding rates. Because the stablecoin crowd leans long, XBTUSDT typically commands a higher funding cost. This delta, the difference in the “cost to hold”, is the source of our yield farming and depeg hedging strategies.

It's a BitMEX Trade

Thanks to multi-asset-margin on BitMEX, you can execute this strategy seamlessly in one place:

Unified Margin: Open both positions (long/short XBTUSD and the inverse on XBTUSDT) using only USDT collateral within a single account.

Efficiency: Capture the funding spread directly. There is no need to move collateral between exchanges or manage counterparty risk.

This integrated environment allows you to manage the entire trade—whether you’re farming yield or betting on a depeg—with maximum operational efficiency.

Trade 1 — Farm the Yield

XBTUSDT has cost more to hold than XBTUSD for most of the last 4.6 years. Here's the average annual funding for each contract, over different lookback windows:

While returns are market-dependent—averaging 4.33% over the long term—recent windows have been tighter, with 1.33% over the last year and 0.53% over the previous quarter. Interestingly, XBTUSDT only carries a higher premium 46.5% of the time; the yield is driven by the magnitude of these spreads rather than their frequency.

That said, profits arrive in aggressive bursts rather than a steady stream. Execution involves a short on XBTUSDT paired with an equal long on XBTUSD. This delta-neutral structure eliminates Bitcoin price risk, allowing you to harvest the funding gap.

Amplifying Returns with Leverage

Because this trade is delta-neutral and insulated from directional price risk, you can apply leverage to amplify your funding capture. This strategy effectively transforms modest single-digit returns into substantial double-digit gains, as demonstrated in the table below.

The Risk: Tether Depeg

Behind the attractive yield lies a hidden risk factor: once your Bitcoin exposure is neutralised, you are essentially holding a long position on Tether's stability. Think of the funding you harvest as compensation for absorbing Tether risk. Should USDT falter, this trade absorbs the blow—and leverage multiplies the damage.

Determining Optimal Leverage

Choosing your leverage requires balancing yield maximisation against tail risk. Historically, Tether risk has remained low, making 10x leverage a viable setting for capturing this spread. We recommend maintaining leverage above 5x; positions smaller than this often struggle to generate meaningful yield relative to the capital deployed. While higher leverage naturally increases your exposure to a depeg, the low historical probability of such an event allows you to target higher returns, provided your position is sized to withstand short-term volatility.

Trade 2 — Bet on a Depeg

Execute the reverse: short XBTUSD and go long XBTUSDT. Your Bitcoin exposure is again neutralised, but you are now positioned to profit if Tether breaks its $1 peg.

The mechanics are simple: monitor the XBTUSD / XBTUSDT ratio, which represents the market's implied valuation of Tether. While the peg is secure, the ratio hovers near 1.00. Should Tether slip to $0.98, the ratio follows; your long on XBTUSDT appreciates relative to the short, capturing the spread as pure profit. This is effectively a direct wager against Tether's stability, executable via two standard BitMEX orders without requiring specialised accounts or additional counterparties.

The Cost:

You pay the funding divergence described in Trade 1—historically between 1.3% and 4.3% annually. View this as a modest, recurring premium for a high-convexity payout.

The Payout:

The payout mirrors Trade 1 in reverse – where every loss is now inverted into a gain:

Your loss is limited to the small fee you pay (plus minor moves if Tether trades slightly above $1). Your payout would be substantial if Tether becomes insolvent:

Tether Depegs in the past

In normal conditions, the depeg bet generates no returns. Payouts occur only under periods of intense stablecoin stress. To evaluate the trade’s viability, we analysed 1-minute historical data to capture the precise maximum spread during actual crises. Below is the record of the divergence between XBTUSD and XBTUSDT during three major market shocks. The depeg bet harvests this divergence; the yield farmer absorbs the corresponding loss.

Note that tick data may differ; these figures are used for illustrative purposes to demonstrate the concept.

Terra May 2022 (win): The contracts diverged by +5.6% at the peak of the panic—XBTUSD traded at ~$25,900 while XBTUSDT hit ~$27,300, effectively pricing Tether at ~$0.95. This move delivered a +56% return at 10× leverage for depeg bettors.

FTX Nov 2022 (win): The spread widened to +2.0%, netting a ~20% gain at 10× leverage.

USDC / Silicon Valley Bank Mar 2023 (loss): The gap inverted to -1.2% as capital rotated from USDC into Tether. Because this trade is a specific short on Tether, a flight to Tether’s perceived safety results in a ~12% loss at 10× leverage.

Crucially, this position is effectively a short on Tether’s stability. While systemic shocks to rival stablecoins can temporarily drive Tether to a premium, its long-term resilience is noteworthy; USDT has not slipped more than 0.4% below par over the last 4.6 years.

Farm the Yield, or Own the Tail

Farm the Yield if you believe the stablecoin crowd will continue paying a premium to maintain long exposure (a trend persisting for four years), while the funding divergence maintains its 4% average and Tether continues to weather systemic shocks. This delivers a consistent, equity-like yield without directional Bitcoin exposure—provided your leverage is calibrated to survive volatility.

Bet on a depeg to secure a high-convexity position with capped downside; you pay a nominal annual premium for a massive payout during a legitimate Tether solvency crisis. The primary caveats: yield compression occurs during stagnant periods. It may work against you if capital rotates into Tether during a rival stablecoin's collapse, as seen in the USDC depeg in early 2023.

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