Are you wondering how to use the Pionex Spot-Futures Arbitrage Bot and how it works? Read our Pionex Spot-Futures Arbitrage Bot tutorial and learn everything there is to know about it!
Disclaimer: We want to emphasize that this is not financial advice. Cryptocurrencies operate in a volatile market, where values can drastically fluctuate in a blink of an eye. It is imperative to conduct thorough research and seek guidance from a qualified financial advisor before investing.
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 common 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 the Arbitrage bot to catch this volatility. 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 we're going to show you how to arbitrage from these inefficiencies.
What are 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 reasons perpetual futures contracts is so popular in the crypto community.
Typically, traditional futures contracts settle on a monthly or quarterly basis. At settlement, the contract price converges with the spot price, and all open positions expire.
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.
Exchanges do not charge the funding fee. Instead, it is 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.
What is the Spot-Futures Arbitrage Strategy?
To sum up, it is holding a short position in the perpetual futures market while holding the same amount of position in the spot market. Arbitrage with a market-neutral position and receive the funding rate every 8 hours.
The funding rate comprises two components: the interest rate and the premium. The interest rate is 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!
Tutorial for the Spot-Futures Arbitrage
Let’s say we have 10000 USDT for the spot-futures arbitrage while bitcoin’s price is 10000 USDT. Here’s how we’re going to do:
- Transfer 5000 USDT to the futures account and the rest 5000 USDT to the trading account.
- Buy 0.5 BTC (5000USDT) in the spot market and short 0.5 BTC in the perpetual futures market with your 5000 USDT
- If the current funding rate is 0.05% right before the charges, then you’ll get 2.5 USDT.
- If the funding rate remains at 0.05%, we can receive 3 times a day, which means it’s 27.375% APR
To increase the annualized return, let’s take advantage of the leverage in the perpetual futures. If we hold the short position with 2x leverage, then we’re able to buy 0.6666 BTC with 6666 USDT while short 0.6666 BTC with 3333 in the perpetual futures market.
We’ll receive 33% more funding fee (3.333 USDT) compared to 1x leverage
0.666 * 10000 * 0.05% = 3.333 USDT
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 means you can cover that loss within 2~3 funding rate income. If you're careful with 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.
What are the risks for crypto arbitrage?
There are some risks to performing spot-futures arbitrage manually that you should know in advance.
- You’re not able to decrease your position in the spot market while the auto-deleveraged happens to your futures position.
- The rapid price surge gets you liquidated on your short position because you’re not able to close your futures position in advance.
The above two examples show us how our market-neutral position could get broken under particular market conditions. To eliminate the above risks, Pionex provides a bot for spot-futures arbitrage. Here’s how the bot would deal with the potential risks:
- The bot will detect both your position in the spot and futures market and maintain a market-neutral position even the auto-deleveraged (ADL) happened.
- The bot will close your futures position 5% before the liquidation price. So that you won’t be liquidated and pay for the liquidation fee.
5 Tips for using a Crypto Arbitrage Bot
- Don’t switch between coins too often. Please remember that you’ll have some trading fee costs when you start and close a bot.
- As long as the funding rate stays positive, keep the bot active for at least 1~2 weeks. But you can still shut it down anytime you want.
- One arbitrage bot with one coin at a time. You’re free to top up more money or take some out at any point.
- Don’t put all your eggs in one basket. Choosing to arbitrage 2~3 coins at the same time would be better.
- It’s better to start the bot while the price gap is higher; shut down the bot while the price gap is lower or negative.
How to start using the Spot-Futures Arbitrage Bot on Pionex?
Step 1. Download Pionex App. Scroll down to the bottom of the bot list and click arbitrage bot.
Step 2. Select the target coin and preferred leverage for the arbitrage. Click the drop-down button next to the coin to lead you to the list sorted by the current funding rate.
Step 3. Fill in the investment amount and click create bot. It’ll automatically transfer some of your funds to your futures account and create a position in the spot and futures market.
Step 4. If you want to close the bot, just click the shutdown button on the right top of the bot. It’ll close the position and return all your investment in USDT.