1. What is Spot-Futures Arbitrage?
Spot-futures arbitrage is a funding rate arbitrage strategy designed to earn the funding rate paid by long users to short users by holding cryptocurrency in the spot market while holding a short position of the same asset in the futures market, especially suitable for bull markets. You only need to set leverage for the short position, and the bot will start earning profits.
What is a Perpetual Contract?
Simply put, perpetual contracts are similar to traditional contracts but have no expiration date. Traders who are bullish on cryptocurrency go long and buy contracts at a high price; bearish traders go short and buy contracts at a low price. In traditional contracts, as the delivery date approaches, the contract price gradually converges with the spot price. However, perpetual contracts never settle in the traditional way due to the lack of an expiration date. To prevent large price deviations between perpetual contracts and spot, a funding rate mechanism is designed to link the perpetual contract price with the spot price.
The principle of the funding rate mechanism is: when there are too many participants and funds on one side of the perpetual contract, that side needs to pay a certain funding rate to the other side to incentivize more participants and investment from the other side. Specifically:
1. When the market is dominated by longs, longs need to pay the funding rate to shorts.
2. When the market is dominated by shorts, shorts need to pay the funding rate to longs.
3. When long and short positions are balanced, neither side needs to pay a funding rate to the other.
The proportion paid to the other side is called the funding rate. Funding fees represent the arbitrage profits investors obtain through spot-futures arbitrage trading.
Funding Rate Arbitrage
After understanding the funding rate and funding fee, how does spot-futures arbitrage help us earn funding fees with low risk or even almost no risk? Before explaining funding rate arbitrage, several key points need to be clarified: First, the funding rate is settled every 8 hours, three times a day.
Second, a positive or negative funding rate indicates the payment direction. When positive, longs pay shorts; when negative, shorts pay longs. Third, since the funding rate of perpetual contracts in the cryptocurrency market is mostly positive, longs usually pay fees to shorts in most cases.
The following uses BTC spot and perpetual contracts as an example to illustrate how perpetual contract arbitrage works. Suppose the market funding rate is 0.03% and remains unchanged, the arbitrageur will buy spot assets and short perpetual contracts. Assume the current BTC price is 5,000 USDT, and the investor uses 10,000 USDT for spot-futures arbitrage with a cycle of 365 days:
First, divide the total funds (10,000 USDT) into two parts. Buy 1 BTC (5,000 USDT) and use 5,000 USDT to short 1 BTC in the perpetual contract market (no leverage).
Second, after shorting the perpetual contract, the investor will receive a funding fee of 1.5 USDT (1 ✖️ 5,000 ✖️ 0.03% = 1.5 USDT).
Third, during the strategy cycle, the investor can receive 1,095 USDT funding fees (365 days ✖️ 3 times/day = 1,095). The total profit is 1642.5 USDT (1095 ✖️ 1.5 = 1,642.5). The annualized return can reach 16.425% (1,642.5 / 10,000 ✖️ 100%).
2. Spot-Futures Arbitrage Operation Instructions
Advantages:
If the market is bullish and the funding rate is high, you can choose a bot.
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Low risk: The spot-futures arbitrage bot holds both spot assets and short positions simultaneously. In most cases, the risks of these two investments can offset each other, ensuring the safety of the principal.
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Low cost: The bot's cost is the trading fee for spot and futures transactions, which can usually be fully covered by the funding fee in a bull market.
3. How to Create/Terminate a Spot-Futures Arbitrage Bot?
There are two ways:
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Follow bot providers/copy backtested bots: You can filter out high-performing or backtested bots in the recommended section and follow the provider or copy the bot for trading.
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Customize a bot: You can set leverage for the short position based on the current funding rate in the futures market and your judgment of the coin price trend to create a spot-futures arbitrage bot.
Tip: As the coin price fluctuates, the higher the leverage, the greater the risk of liquidation.
3.1 Complete Process for Creating a Spot-Futures Arbitrage Bot
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:
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It is recommended to terminate the bot when the funding rate remains negative.
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After termination, the short position will be closed at market price, and the spot assets will be sold at market price.
Gate reserves the final interpretation right for the product.
For further assistance, please visit the official Gate support page or contact the customer service team.
