Hyperliquid oil short sellers face 500% annualized funding cost

On crypto exchange Hyperliquid, traders who hold long oil derivatives are receiving 500% a year in funding. Those payouts land every hour, layering on top of gains in the crude price itself, which has climbed back to $100 a barrel.

Of course, anything that sounds too good to be true probably is. Wall Street offers no free lunches.

For starters, Hyperliquid's leverage is extreme — Brent oil can be traded at up to 20x — so even run-of-the-mill intraday moves can wipe out a portfolio.

Even traders who avoid leverage on Hyperliquid face countless financial risks from bugs, hackers, market manipulators, fragile technology and offshore counterparties.

Still, today's hourly funding rates on Brent and WTI oil perpetuals are deeply negative. This points to an overcrowded short side, with shorts paying fees to borrow margin exposure from longs who are less in demand.

The one-sided positioning is so pronounced that shorts must pay 500% annualized to anyone willing to go long.

Many Hyperliquid short sellers are intraday traders, so a trade lasting only minutes or hours incurs minimal funding fees. Even so, the gulf between the rates shorts pay and the rates longs receive is striking.

Brent is still below the $126 peak it reached on April 30, rewarding anyone short since then, but longs have recently had the upper hand.

As shorts look on in disbelief at fast-rising prices, longs are enjoying leveraged gains and hourly funding payouts.

Oil has jumped 6% today alone. The world's most heavily traded commodity is now 24% above where it stood 30 days ago, with tensions escalating in the tanker straits of Hormuz and Bab el-Mandeb.

Year to date, oil has gained 75%.

The Iran war that started in February has kept squeezing seaborne supply and global logistics for the millions of barrels the world consumes each day.

These payments are not literally coming from a Hyperliquid corporate account

Strictly speaking, Hyperliquid's funding rates are not an exchange fee. Hyperliquid does not generally make discretionary choices about them.

Rather, an algorithm sets the rates, and the transfers happen hourly between traders.

Funding rates are designed to pull Hyperliquid's crypto-native oil perpetual back to the so-called “oracle” price. Oracle providers try to monitor real-world prices outside blockchains and broadcast that data onto blockchains in a well-formatted, standardized, reliable way.

When the contract trades below the oracle price, shorts pay longs; when it trades above, the direction reverses.

The monthly futures contract roll was blamed by Hyperliquid News for today's unusually severe funding rates. Writers at the publication said, “It’s simply due to the roll schedule.”

Concretely, Trade[XYZ] is rolling WTI oil from V6 to X6 and Brent from X6 to Z6 during the September 8-14 window.

But such big jumps in funding are unusual when futures are being rolled. Because oil is so volatile, Hyperliquid's contracts have drawn unusually heavy one-way interest this week for several reasons.

Earlier this year, Washington was asked by US exchanges ICE and CME to police Hyperliquid's anonymous oil books, with a warning that the global price could be distorted.