A Quick Guide to get annualized 50~80 APR of Ethereum Funding Rate Arbitrage Bot
Low-Risk one-click position opening bot for Ethereum Spot-Futures Arbitrage leverage on Pionex Spot-Futures Arbitrage bot experience and tutoring
This article will introduce a strategy that can maintain an annualized 50~80% interest rate with low risk. Note that this strategy is only applicable during a bull market. Hodler may have the greater performance.
Recently Elon Musk announced the use of Bitcoin as a payment tool purchased $1.5 billion bitcoin, and it can be used to buy Tesla, and then Bitcoin has risen to a new level. At this time, I heard that many friends want to invest in it, but they are a little afraid of not daring to enter. The market is on the sidelines; this article will share a low-risk, high-profit indirect investment strategy to participate in the bull market.
In fact, most of the crypto investors who were originally here will also allocate a part of the funds to do hedging, which means that I will not sell the spot in hand, but short the equivalent position to protect my current profit. This is the original purpose of futures as a hedge, rather than short-selling to make a profit.
The origin of funding rate arbitrage is actually a blog article Earning Interest Income on XBTUSD with Minimised Risk published by the former cryptocurrency futures exchange BitMEX CEO Arthur Hayes official blog in 2016. This article is mainly used for hedging through contracts. At that time, there was a well-known incident involving the Bitfinex hack, and the lost funds Bitfinex had been repaid to investors. This method earned the interest of Bitcoin as the denominated unit and then transferred to US dollars.
Introduction
Perpetual swap
It is an innovative derivative financial product launched by BitMEX in 2016. According to BitMEX’s perpetual contract guide, this is a reasonable price marking system to avoid unnecessarily forced liquidation on highly leveraged products. This system sets the marked price to a reasonable price instead of the latest market price, thereby avoiding unnecessary liquidation.
Without this system, the marked price may deviate unnecessarily from the price index due to market manipulation or lack of liquidity, leading to unnecessary forced liquidation.
In short, perpetual swap contracts are derivatives that allow you to buy or sell the value of something, similar to traditional futures contracts, but with the following differences:
- The contract has no expiry date, and the underlying asset itself will never be delivered.
- Perpetual swap contract is similar to a margin spot market, so its transaction price is close to the underlying reference index price.
- The funding fee mechanism is used to anchor the contract to the spot price of the underlying asset.
- Unlike futures contracts, futures contracts may trade at significantly different prices due to the basis difference of price.
3. Each perpetual contract has its own detailed information, which can be found in the exchange contract details：
- Index price
- Funding rate
- Maximum leverage
Funding rate
In the market, the price of futures contracts may deviate from the underlying spot price. The value of the deviation between futures and spot prices is called the premium/discount index. To maintain the perpetual contract always being closely linked to the index price, a funding rate mechanism is adopted. The premium index will increase the next funding rate; the discount index will decrease the next funding rate to align with the current swap contract price level.
- When a premium index appears (the futures price is higher than the spot price), the long investors pay the short investor's funding rate.
- When a discount index appears (the futures price is lower than the spot price), the short investors pay the long investors' funding rates.
Calculation of funding rate
(1) Interest Rate Component
Interest Rate (I) = (Interest Quote Index - Interest Base Index) / Funding Interval
where
Interest Base Index = The Interest Rate for borrowing the Base currency
Interest Quote Index = The Interest Rate for borrowing the Quote currency
Funding Interval = 3 (Since funding occurs every 8 hours)Different exchanges calculate funding rates at different times. BitMEX, Binance, and other exchanges calculate the funding rate every eight hours; FTX exchanges calculate the funding rate every hour. Different exchanges may have different funding fees in the same currency rate.
(2) Premium / Discount Component
Premium Index (P) = (Max(0, Impact Bid Price — Mark Price) — Max(0, Mark Price — Impact Ask Price)) / Spot Price + Fair Basis used in Mark Price(3) Funding Rate Calculation
Funding Rate (F) = Premium Index (P) + clamp(Interest Rate (I) - Premium Index (P), 0.05%, -0.05%)This calculated Funding rate is then applied to a trader’s position value to determine the funding amount to be paid or received at the funding timestamp.
- The funding rate ensures that the transaction price of the perpetual swap contract closely follows the underlying index price.
- Swap contracts are similar to the spot market of margin trading, where buyers and sellers regularly exchange funds rates.
- The exchange takes no fees from funding rates as they happen directly between traders.
After introducing the principle of extendable commodities above, the method of spot-futures funding rate arbitrage will be introduced below.
Spot-Futures Arbitrage
First, choose a mainstream cryptocurrency, and the funding rate should be premium so that long positions will be paid to short positions. For example, BTC, ETH has a large market value and have a positive funding rate for a long time. The author will use three times the leverage The strategy of ETH hedge is explained:
Assuming that you have $1,000, you use $750 to buy ETH spot, $250 to buy 3 times leveraged short futures equal to worth $750, the short position and the spot holding value are always the same, the value of total assets will always be The constant is $1,000, which is the same as the initial investment amount. In this case, you can receive a funding rate of $750 for three times leveraged short positions.
Calculated at an annualized rate of 60%, $50,000 a month can receive about $2,500 in interest, and some transaction fees and closing fees may be charged.
Liquidation risk
The three-times leveraged short position is because the margin only provides $250 to maintain the short position of $750. If the price of ETH continues to rise, the value of the spot on hand will continue to rise until ETH rises to 25%, then the position of the short would liquidate, there is no way to continue to receive the funding rate, and because there is no short position to get funding rate. At this time, if the ETH falls after it rises, the spot value will begin to lose.
Solution
The futures arbitrage robot launched by Pionex Quantitative Exchange can use the robot to open a spot-futures arbitrage with one click so that investors don’t have to worry about any point in time. After setting the parameters, they will immediately begin to help allocate funds. When a position is first opened, a position opening procedure will occur. This fee is a transaction fee charged by Pionex (the transaction fee is 0.05%), and it is combined with the automatic position balance mechanism to minimize the risk of liquidation. When the price increase reaches a certain ratio, it will start to close the position and reopen it, incur some closing fees, and a small range of spot-futures slippage.
Note: Pionex’s futures are placed on Binance. There are still risks of centralized exchanges. Investors are requested to be cautious.
After reading through, some people may ask, if you are a novice who has not been exposed to virtual currencies at all, you may be very confused. This strategy sounds quite complicated. What should I do to participate as a crypto beginner investor?
In view of the fact that many fiat currency exchanges provide unreasonable transaction fees and charge customers withdrawing or depositing fees, here is an investment channel that I think is must cost-effective for handling fees:
Step 1: Sign up FTX exchange deposit USD
It is recommended that investors who want to use US dollars to deposit funds can choose to register on the FTX exchange in Hong Kong because FTX deposits more than 10,000 USD from the bank will not charge any fees, and all legal and cryptocurrency withdrawals are fee-free! It is also worth mentioning that according to the official fee structure, as long as you purchase 25 FTT and stake, all trading pairs including Tesla stocks, derivatives, cryptocurrencies, etc. can have a zero marker fee discount.
Register through this URLs to enjoy a 5% discount on transaction fees
Step 2: Maker order purchase USDT
After depositing, it will become USD. This USD can be withdrawn as USDC, Pax, BUSD, TUSD, HUSD, and other stable currencies. If you want to use Pionex for spot-futures arbitrage strategy, you need to convert to USDT, go to the USDT/USD trading pair on the FTX exchange to make an order.
Note: USDT may be more expensive than USD, please find an exchange rate entry order you like.
Step 3: Transfer USDT to Pionex personal wallet
Transfer to a personal Pionex USDT via Omni or ERC-20 or TRC-20 wallet.
Note: USDT addresses on each public chain can only be transferred to the same public chain personal wallet, such as TRC-20 to TRC-20
Step 4: One-click position opening spot-futures arbitrage bot on Pionex
- Open the Pionex App and select the transaction in the middle screen
- Click the Create Robot (ETH/USDT) button
- Robot select spot-futures arbitrage
- Pull USDT to 100% (free adjustment)
- Leverage selection 3x (free adjustment)
- Click to create a robot
After waiting for the creation of the robot. Congratulations on your success in joining low-risk 50~80% APR. There is a lot of information here for interested investors to learn.
The above content does not constitute investment advice. Please manage your finances carefully and deposit the money in the bank.
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FTX: https://ftx.com/#a=1378824
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