What if I told you there’s a way to earn from trading that’s low risk and works in all markets whether they go up or down? It’s called “arbitrage”, and it takes advantage of inefficiencies in the market. Arbitrage is usually in the form of simultaneously buying and selling assets by exploiting the differences in price between identical assets in two or more markets.
You could for example buy BTC on one exchange and sell it on another exchange when there’s a difference in price you could cash out the difference. Unfortunately that would involve sending crypto from one exchange to the other, that takes time and involves a fee. It’s not an easy process.
Another way would be to find price inconsistencies between trade pairs, e.g. eth/bnb, eth/usdt and bnb/usdt. Sometimes there’s a delay in price conversion between pairs and by buying/selling pairs you could profit from these delays. But this is also a tedious process, you’d have to monitor different trade pairs and act quickly.
What if I told you there is a simpler and more efficient way?
Spot/Futures Arbitrage Bot
These days most crypto exchanges also double up as crypto futures exchanges. Trading futures contracts has some advantages over trading in a traditional spot market such as use of leverage up to 125x, short selling…etc.
Usually Future contracts settle on a monthly or quarterly basis. That’s the moment the price converges with the spot price and all open positions expire. With perpetual futures however there’s no expiration, any deviation from the underlying spot price needs to be addressed to ensure prices converge on a regular basis. That mechanism is known as the Funding Rate.
Whenever a perpetual future contract is trading on a premium (the price is higher than the underlying asset on the spot market) long positions have to pay a funding rate to the short positions. Whenever the price is lower than the price of the underlying asset on the spot market, the short positions pay the long positions.
Let’s say we buy Bitcoin for price X on the spot market and short sell the same amount for the same price X on the futures market, we hedged our investment. When the market goes up we will gain on the spot market but because of our short position on the futures market we’ll lose the same amount so we’re basically market neutral. The opposite is also true, if price drops on the spot market our short position will gain the same amount making our trade market neutral.
More often than not the futures price is higher than the spot price especially in a bullish market because more investors hold long positions than short positions. This means long positions have to pay short positions. By holding a short position on the futures market while holding the same long position on the spot market makes us market neutral but entitles us to receive the funding rate every 8 hours.
The funding rate has two components, the interest rate and the premium. The former is fixed e.g 0.01% for 8 hours on Binance. The premium varies and depends on the price difference between the perpetual futures contract and the mark price. For most coins this funding rate has been nearly always positive meaning it’s paid to those holding a short position.
On https://www.binance.com/en/futures/funding-history/1 we can check the funding rate history for coin pairs for the past 14 days
Every 8 hours the funding rate is payed out, that means in a day there are 3 payouts. For ETH here the funding rate is on average 0.0852% per 8 hours our about 0.2556% per day.
Let’s illustrate with an example
Assume we have
10 000 USDTand we’re going to trade ETH/USDT
We divide the 10K into 5K on the futures account and 5K on the spot account and buy ETH with it on the spot account and short 5K in ETH on the perpetual futures market. If the current funding rate is 0.05% then we get on our 5K (in our futures account)
5K * 0.05% = 2.5 USDT
The 2.5 USDT is paid out 3 times a day. After one year (if the average funding rate is constant) that adds up to
3 * 2.5 * 365 = 2737.5 USDT
2737.5 USDT return on 10K USDT
2737.5 / 10000 * 100% = 27.375% APR
That’s of course without any leverage. Let’s assume we take a little bit more risk and short our position with 3x leverage.
This means we only need 1/3 of the money in our futures account of what we have in our spot account. For 10k this means we put 7500 USDT in our spot account and 2500 USDT in to our futures account.
(0.75 * 10000) * 0.05% = 3.75 USDT
After 1 year that’s:
3 * 3.75 * 365 = 4106.25 USDT
4106.25 USDT return on 10K USDT
4106.25 / 10000 * 100% = 41.0625% APR
That’s a whopping 41% APR
Of course there are some risks and complications.
- When you’re setting this up manually you’re not able to decrease your position in the spot market when auto-deleveraging is occurring.
- In case of a sudden price increase, liquidation might happen on your short position because you were unable to close your futures positions in time.
To mitigate those risks you can use a trading bot that can automatically
- maintain a market neutral position even if auto-deleveraging occurred.
- bot will close your futures position 5% before the liquidation price, to avoid liquidation and liquidation fee.
Pionex charges 10% of the profit and invests half of it into a SAFU fond (more on this here: https://pionex.zendesk.com/hc/en-us/articles/360062079894-Pionex-s-Arbitrage-SAFU-Program)
Choose the bot
Pick your coin pair
The above references an opinion and is for information purposes only. It is not intended to be investment advice and may contain affiliate links. Seek a duly licensed professional for investment advice.