1.What is Spot-Futures Arbitrage?
Spot-Futures Arbitrage is a funding fee arbitrage that aims to earn funding paid by users who go long to users who go short by holding cryptocurrency in the spot market while maintaining a short position of the same asset in the futures market, especially suitable for a bullish market. You only need to set leverage for short positions and then the bot will start to earn a profit.
What is Perpetual Futures?
Simply put, perpetual Futures is similar to traditional Futures but without an expiration date. Traders bullish on a cryptocurrency will take long positions, buying Futures at high prices, while those bearish will take short positions, buying Futures at low prices. In traditional Futures, the contract price gradually converges with the spot price as the delivery date approaches. However, perpetual Futures never settle in the traditional sense because they have no expiration date. To prevent significant price deviations between the Perpetual Futures and the Spot, a funding rate system is designed to link the price of Perpetual Futures with the price of Spot.
The principle of the funding rate mechanism is that when there are so many participants and funds in Perpetual Futures, one side needs to pay a certain funding rate to the opposite side to incentivize an increase in the number of participants and the investment amount from the opposite side. Specifically:
1.When the market is dominated by long traders, they must pay the funding rate to short traders.
2.When the market is dominated by short traders, they must pay the funding rate to long traders.
3.When the market is balanced between long and short positions, neither side needs to pay the funding rate to the other.
The percentage paid to the opposite side is known as the funding rate. The funding fee represents the arbitrage profit earned by investors engaging in Spot-Futures Arbitrage transactions.
Funding Rate Arbitrage
Now that we understand funding rates and fees, how does Spot-Futures Arbitrage help us earn funding fees with low or virtually no risk? Before explaining funding fee arbitrage, a few key points need to be clarified:
First, the funding rate is settled every 8 hours, and it changes three times a day.
Second, positive and negative funding rates represent the payment direction. A positive one indicates that long traders pay the short traders, while negative ones mean that short traders pay the long traders.
Third, given that funding rates for Perpetual Futures in the cryptocurrency market are mostly positive, long traders typically pay fees to short traders in most cases.
Here’s an example using BTC Spot and Perpetual Futures to illustrate how Perpetual Futures Arbitrage works. If the market funding rate is 0.03% and remains constant, the arbitrageur would buy the spot asset and short the Perpetual Futures. Assuming the current BTC price is 5000 USDT, the investor conducts a Spot-Futures arbitrage with an investment of 10,000 USDT over a period of 365 days:
First, divide the total funds (10,000 USDT) into two parts. Buy 1 BTC (5000 USDT) and use 5000 USDT to short 1 BTC in the Perpetual Futures market. (No leverage)
Second, the investor will receive 1.5 USDT in funding fees after shorting the Perpetual Futures. (1 ✖️ 5000 ✖️ 0.03% = 1.5 USDT)
Third, during the strategy period, the investor can earn 1095 times the funding fee (365 days ✖️ 3 times per day = 1095). The total return would be 1642.5 USDT (1095 ✖️ 1.5 = 1642.5). Annual returns can reach 16.425% (1642.5 / 10000 ✖️ 100%).
2.Spot-Futures Arbitrage Instructions
Advantages:
You can choose the bot if the market is bullish with a high funding rate.
1.Low Risk: The Spot-Futures Arbitrage bot simultaneously holds spot assets and short positions. In most cases, the risks of these two types of investment can offset each other, guaranteeing your principal.
2.Low Cost: The bot’s cost is the trading fees for spot and futures trading, which are likely to be fully covered by the funding fees in a bull market.
3.How to Create/Terminate the Spot-Futures Arbitrage Bot?
There are two methods:
1.Follow a bot provider/Copy a backtesting bot: You can filter out top performers or backtesting bots in the Recommended section and follow a provider or copy a bot to trade.
2.Customize your own bot: You can create a Spot-Futures Arbitrage bot by setting the leverage for short positions based on the current funding rate in the futures market and your assessment of the coin price trend.
Tips: As the coin price fluctuates, the higher the leverage, the higher the liquidation risk.
3.1 Complete Process of Spot-Futures Arbitrage Bot Creation
Web:
Bots - Bot Pool - Create a Bot - Reliable And Long Term Yield - Spot-Futures Arbitrage - Create
APP:
Bots - Create a Bot - Spot-Futures Arbitrage - Create
3.2 How to Terminate Spot-Futures Arbitrage
You can stop the Spot-Futures Arbitrage bot at any time. Please note:
1.The bot should be terminated when the funding rate is consistently negative.
2.After termination, short positions will be closed at market price, and spot assets will be sold at market price.
Gate reserves the final right to interpret the product.
For further assistance, please visit the Gate official support page or contact our customer support team.