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Arbitrage Opportunities in the Volatile Crypto Market
The highly volatile market in cryptocurrency gives most investors a high-risk and high-return investment impression. It’s normal to see a coin surge up to 20% and then head to a 20% correction on the next day. So lots of people are using Arbitrage bot to catch these volatile. In addition to the spot market, lots of exchanges also offer perpetual futures contracts that allow traders to use up to 125x leverage, making the cryptocurrency market even more volatile.

On the other hand, the inefficiencies between each market give us plenty of opportunities to arbitrage. It’s easy to reach 15%~50% APR with arbitrage strategies, and I’m going to show you how to arbitrage from these inefficiencies.

Pionex arbitrage bot
The results looks amazing huh?

Before talking about how to seize the arbitrage opportunity, let me introduce the fundamental of perpetual futures contracts first.

What is Perpetual Futures Contracts?
Unlike traditional futures, perpetual futures contracts don’t have an expiration date, so that traders can trade perpetual futures just like spot trading. That’s one of the main reason perpetual futures contracts is so popular in the crypto community.

Since perpetual futures contracts never settle in the traditional sense, exchanges need a mechanism to ensure that futures prices and index prices converge on a regular basis. This mechanism is also known as Funding Rate.

The funding rate plays an essential role in the arbitrage opportunity that we’re going to discuss in the next section.

What is the Funding Rate
The funding rate ensures that futures prices and index prices converge regularly.

So when a perpetual futures contract is trading on a premium (higher than the spot markets), long positions have to pay shorts due to a positive funding rate. In contrast, short positions pay longs while the futures price is trading below the index price.

The Index Price consists of the average price of an asset, according to major spot markets and their relative trading volume.


The exchanges do not charge the funding fee. It’s paid peer-to-peer.

Most of the investors in the crypto market like to hold a long position rather than a short position, which means traders with long positions need to pay funding rates to those who have a short position.

So here’s the arbitrage opportunity. We can hold a short position in the perpetual futures market and buy the same amount in the spot market, hedging our total investment. Our investment won’t be affected by the market fluctuation due to the market-neutral position but receive funding rates with our short position in the perpetual futures contracts.

The funding rate comprises two components: the interest rate and the premium. The interest rate fixed at 0.01% per 8 hours, and the premium varies according to the price difference between the perpetual contract and mark price.

According to the historical data of the ETH funding rate on Binance, the rate has always been positive in the last 6 months. And it’s higher when the price surge in the following chart. If we can receive a 0.2% funding rate per day, the performance for this arbitrage would be 36.5% APR!

With the historical data, it’s steady and almost risk-free to arbitrage from the funding rate. Next, let’s discuss how to execute the arbitrage by ourselves.

APR under different leverage
The performance increases to 36.46% APR with 2x leverage; 41.0625% APR with 3x leverage!

Besides using higher leverage with your short position and checking the list for a coin with a higher funding rate, the price difference between the futures price and index price should also be considered.

The Price gap between futures and index price.
The price gap is not always a fixed number between futures and index prices. It’ll result in some profit if the gap is lower when you’re about to stop the bot, and suffer from some losses if the gap is higher.

But it’s not that much, which you can cover that loss within 2~3 funding rate income. If you take care of the price gap, you might earn some profit from the price gap.

Don’t start arbitrage if the price gap is negative.
Finish your arbitrage strategy and close your positions when the gap is lower or negative.
Normally, the gap is floating between -1% and 1% most of the time.
Spot-futures arbitrage is a simple strategy that traders could do it manually, but it’s better to use a tool for opening positions and closing positions due to the volatility.


Pionex Crypto Arbitrage Bot

https://www.pionex.com/blog

Referral link
https://www.pionex.cc/en-US/sign/ref/7mIp8O51