On November 28 at 16:00, AICoin editor presented a graphic sharing titled [From 0 to 1: How to Master Arbitrage?] in [AICoin PC - Group Chat - Live Broadcast], below is a summary of the live content.
1. Arbitrage principles
(1) Funding rate arbitrage
Funding rate arbitrage is a trading strategy that utilizes the funding rate mechanism in the perpetual contract market, simultaneously opening opposite-direction, equal-value positions in both the spot and perpetual contract for the same underlying asset.
When the funding rate is positive, longs pay shorts; when the funding rate is negative, shorts pay longs.
The goal of funding rate arbitrage is to earn stable funding income through trading between the spot market and the perpetual contract market.
AICoin's funding rate arbitrage is mainly divided into two categories:
Positive arbitrage: funding rate is positive, borrow assets to buy spot, short the perpetual contract.
Reverse arbitrage: funding rate is negative, borrow assets to sell in the spot market, go long on perpetual contracts.
Reverse arbitrage carries higher risks; it is recommended to engage in positive arbitrage.
Taking positive arbitrage as an example:
Assuming the current BTC price is 95,000 USDT, and the funding rate is 0.03%, using 4,000 USDT for funding rate arbitrage, with 1x margin. The operation is as follows:
1. Buy 2,000 USDT of BTC in the spot market, while shorting 2,000 USDT of BTC in the perpetual contract market.
2. Assuming the funding rate remains unchanged, earn funding income of 2,000 USDT × 0.03% = 0.6 USDT every 8 hours.
3. Daily earnings of 0.6 USDT × 3 = 1.8 USDT, with an annualized return of 32.85%.
Note: Annualized yield calculation: 1.8×365÷2000=32.85%
(2) Spread arbitrage
Spread arbitrage is a method of profiting from the price differences between the spot market and the futures market (including perpetual and delivery contracts). It is mainly divided into two categories: spot-futures arbitrage and term arbitrage.
Spot-futures arbitrage refers to the practice of profiting from the substantial price difference between the spot market and the futures market of the same trading currency. Since the futures price will revert to the spot price upon expiration, this regression opportunity can be seized.
Term arbitrage seeks price differences between contracts of different maturities for arbitrage.
Taking spot-futures arbitrage as an example:
1. Spot price < futures contract price
Strategy: Buy spot, short the contract (both have the same value), when the price difference reverts (price difference decreases), close the position for profit.
2. Spot price > futures contract price
Strategy: Sell the spot, go long on the contract (both have the same value), when the price difference reverts (price difference decreases), close the position for profit.
Assuming the spot price of BTC is 95,000 USDT and the quarterly contract price is 99,000 USDT, the price difference is 4,000 USDT.
The contract price is higher, so buy the spot and short the contract.
If it is a unilateral downtrend, for instance, if the spot price falls to 88,000 USDT and the quarterly contract is at 90,000 USDT, with the price difference narrowing to 2,000 USDT, close the position.
Spot loss: 95,000 USDT - 88,000 USDT = 7,000 USDT
Contract profit: 99,000 USDT - 90,000 USDT = 9,000 USDT
Final profit: 9,000 USDT - 7,000 USDT = 2,000 USDT (actual fees must still be deducted).
If the price rises, and so on.
(2) Spread arbitrage - detailed description version
Spread arbitrage is a method of profiting from the price differences between the spot market and the futures market (including perpetual and delivery contracts). It is mainly divided into two categories: spot-futures arbitrage and term arbitrage. Investors can conduct operations for the same trading currency using professional arbitrage tools like AICoin to obtain spread income.
1. Spot-futures arbitrage
Spot-futures arbitrage refers to the practice of profiting from the substantial price difference between the spot market and the futures market of the same trading currency. Since the futures price will revert to the spot price upon expiration, this regression opportunity can be seized.
The arbitrage process can be simply described as follows:
a. Identify opportunities: Assume the spot market BTC price is 65,000 USDT, while the futures market price is 69,000 USDT, resulting in a difference of 4,000 USDT.
b. Opening operation:
- Short 1 BTC in the futures market (sell at 69,000 USDT).
- Buy 1 BTC in the spot market (costing 65,000 USDT).
c. Close the position for profit: when the price difference narrows, for example, if the futures market price drops to 60,000 USDT and the spot market price drops to 58,000 USDT:
- Futures profit: 69,000 USDT - 60,000 USDT = 9,000 USDT
- Spot loss: 58,000 USDT - 65,000 USDT = 7,000 USDT
- Final profit is 9,000 USDT - 7,000 USDT = 2,000 USDT (actual fees must still be deducted).
2. Term arbitrage
Term arbitrage seeks price differences between contracts of different maturities for arbitrage. Investors trade in contracts with different expiration dates, aiming to profit from price difference fluctuations.
The arbitrage process can be simplified as follows:
- When the price difference between different contracts widens, short the high-priced contract and long the low-priced contract.
- As the price difference narrows, close the position for profit when the conditions are ripe.
Example:
Assuming the next quarter contract price for BTC is 10,000 USDT, while the next week contract price is 10,050 USDT, there exists a difference of 500 USDT, the opening operation is as follows:
a. Go long in the next quarter contract market (buy 10,000 USDT).
b. Go short in the next week contract market (sell 10,050 USDT).
c. Close the position when the price difference narrows; no matter how it fluctuates, profits will be realized through the price difference regression.
The core of spread arbitrage lies in the reasonable use of the price differences between spot and futures, as well as between different expiration contracts, to achieve profit through buying low and selling high.
2. Methods to obtain real-time arbitrage opportunities
The simplest method: alerts + boat carving to seek the sword!
1. Funding rate
Generally speaking, in an upward trend, the funding rate is positive, the higher the rate, the stronger the bullish sentiment, and the greater the funding income obtained from arbitrage. However, the funding rate is not constant.
We need to monitor the rate situation; too low is not good, it can turn negative at any time; too high is also not good, it might be too FOMO, and the market may pull back.
So we need to define a threshold.
When the rate reaches this threshold, we can focus on funding rate arbitrage opportunities.
But constantly monitoring the market is obviously unreasonable.
At this time, our rate alert comes into play.
For example, Binance BTC perpetual, based on past performance, when the funding rate is greater than 0.03%, there are good arbitrage opportunities, so we can set up an alert for Binance BTC/USDT perpetual currency pair when the rate reaches 0.03%.
Other currency pairs are similar, recommended to focus on projects with large market capitalization, good depth, and increasing open interest.
2. Price difference
Taking OKX's spot and quarterly contracts as an example.
The first step is also to determine the price difference threshold; theoretically, the larger the price difference, the greater the arbitrage opportunity for the arbitrageurs.
So how do we determine the threshold?
Original method, manually calculating the difference between the futures contract and the spot currency pair, then comparing one by one, and setting an alert for arbitrage position increase after determining the threshold.
However, this is time-consuming and cumbersome.
Recommended methods:
1. Use combined candlesticks to automatically calculate and synthesize new candlesticks, directly for OKX BTC/28MAR25-OKX BTC/USDT, then obtain the new combined candlestick.
When the price difference starts to widen, we can consider the arbitrage opportunity.
Combined candlesticks can also be used to compare premium situations, such as Binance spot and Coinbase spot, or Binance spot and Upbit spot (kimchi premium).
2. Custom indicators
The greatest advantage of this method is that it can simultaneously plot the price differences of multiple currency pairs.
After plotting, we can similarly compare past trends, and then set a threshold alert.
For example, carving the boat to seek the sword discovers that when the price difference between the quarterly contract and the spot reaches 2,200, there is significant arbitrage space, so we can define alert conditions and set up alert notifications.
Extension:
Based on the funding rate and the patterns of price differences, utilize custom indicators in real-time.
3. Related tutorials
The detailed operation guide is as follows:
Operational tutorial: https://www.aicoin.com/zh-Hans/article/430710
Beginner tutorial: https://www.aicoin.com/zh-Hans/article/396797
Arbitrage terminology explanation: https://www.aicoin.com/zh-Hans/article/396815
That concludes all the content from the live broadcast～
Thank you all for your attention, stay tuned for our live broadcast.
In the bull market, let's explore the trends together and look for trading opportunities! Use AICoin well to earn a free life.
Recommended reading
1. Bull market precision windfall: funding rate arbitrage, locking in future profits.
2. Day 50 of the 20U War God: A new journey for AI grid.
3. Market truth: Volume comes first, price follows.
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