In the simplest way, take you to understand the classic strategy.
OKX, in collaboration with the high-quality data platform AICoin, has launched a series of classic strategy research, aiming to help users better understand and learn different strategies through data testing and analysis of strategy characteristics, and to avoid blind use as much as possible.
Funding Rate Arbitrage is a widely used arbitrage strategy in the cryptocurrency market, aiming to profit from the difference in funding rates between perpetual contracts and the spot market. The core of funding rate arbitrage lies in the use of the funding rate mechanism of perpetual contracts. Perpetual contracts are derivative contracts with no expiration date, and the funding rate is used to balance the difference between the contract price and the spot price. The funding rate can be positive or negative, depending on the market supply and demand. When the funding rate is positive, long positions pay funding fees to short positions; conversely, when the funding rate is negative, short positions pay funding fees to long positions.
Arbitrage Strategy Operation:
Forward Arbitrage: When the funding rate is positive, traders can buy spot and short an equal amount/quantity of perpetual contracts to earn funding fee income.
Reverse Arbitrage: When the funding rate is negative, traders can borrow coins to sell spot and long an equal amount/quantity of perpetual contracts to earn funding fee income.
This arbitrage strategy usually settles funding fees every 8 hours, but under extreme market conditions, the settlement frequency may be higher to curb excessive speculation.
The 4th period strategy test will introduce the funding rate arbitrage strategy and use 3 large data models for testing:
Model 1: Funding rate arbitrage for BTC and ETH in sideways market
Model 2: Funding rate arbitrage for BTC and ETH in a downtrend
Model 3: Funding rate arbitrage for BTC and ETH in an uptrend
This period's data test running standard: The opening condition is a price spread rate greater than 0.05% and a funding rate greater than 0; the closing condition is a price spread rate less than -0.05%.
One-sentence summary of funding rate arbitrage: Funding rate arbitrage is suitable for traders who hope to obtain relatively low-risk returns in the cryptocurrency market and also for professionals with certain market analysis abilities and trading experience.
Comparison of Advantages and Disadvantages
Funding Rate Arbitrage
Category
Details
Advantages
Relatively stable
Relatively low risk
Utilizing market inefficiency
Flexibility
Market neutrality
Disadvantages
Market volatility risk
Liquidity risk
Funding rate fluctuation risk
Trading costs
Operational risk
Applicable Population
Traders seeking stable returns
Professional traders and risk managers
Traders looking to utilize idle funds
Specifically, the applicable population of funding rate arbitrage mainly includes the following categories:
1) Traders seeking stable returns: Funding rate arbitrage is generally considered a relatively low-risk strategy, suitable for traders who hope to obtain returns through stable cash flow. These traders may be cautious about the volatility of the cryptocurrency market and therefore prefer to achieve relatively low-risk returns through arbitrage strategies.
2) Professional traders and risk managers: Since funding rate arbitrage involves complex market analysis and real-time trading execution, it usually requires a certain level of market knowledge and experience. Therefore, professional traders and risk managers are the main target audience for this strategy. They can use the differences in funding rates in the market to make precise trading operations and lock in profits.
3) Traders looking to utilize idle funds: For traders holding idle funds (such as USDT), funding rate arbitrage provides a way to earn additional income from these funds. These traders may take a wait-and-see attitude towards the current market prices but hope to earn profits through arbitrage.
However, although funding rate arbitrage is considered a relatively low-risk strategy, there are still some risks to be aware of:
1) Market volatility risk: The high volatility of the cryptocurrency market may cause price fluctuations, affecting the change in funding rates. This volatility may make arbitrage operations difficult to profit from or even lead to losses.
2) Liquidity risk: Differences in liquidity and trading volume between different exchanges may lead to widened bid-ask spreads, increased trading costs, and reduced potential profits. In addition, low liquidity may make it difficult to execute trades, and market orders may result in significant price slippage.
3) Funding rate fluctuation risk: Funding rates are not fixed and may fluctuate with changes in market supply and demand. When the funding rate changes unfavorably, it may be necessary to adjust or close positions in a timely manner to avoid losses.
4) Trading costs: Arbitrage operations involve multiple trades, each of which will incur transaction fees. These costs may erode arbitrage profits, especially in the case of frequent trading.
5) Operational risk: Arbitrage strategies require simultaneous trading in different markets to ensure that orders can be executed at the same quantity and price. Any operational errors or delays may lead to arbitrage failure.
However, despite funding rate arbitrage being considered a relatively low-risk strategy, traders still need to conduct thorough market research and risk management to minimize potential risks and optimize returns. Funding rate arbitrage has several advantages:
1) Stable returns: Funding rate arbitrage is a market-neutral strategy that earns funding fees by holding hedged positions, allowing traders to earn stable income regardless of market price fluctuations. This strategy is similar to a money market fund and is suitable for traders seeking stable cash flow.
2) Lower risk: Compared to high-risk leveraged futures trading, funding rate arbitrage carries lower risk because it does not rely on predicting market prices but instead profits from differences in funding rates. This strategy reduces market risk by hedging positions in spot and perpetual contracts.
3) Market neutrality: Funding rate arbitrage is a market-neutral strategy, meaning it can operate in bull, bear, or sideways markets. Traders focus on the difference in funding rates rather than overall price trends, making the strategy flexible in any market conditions.
4) Utilizing market inefficiency: This strategy can capture additional profits through short-term inefficiencies in funding rates, which traditional trading cannot achieve.
5) Flexibility: Funding rate arbitrage allows traders to operate on different cryptocurrencies and stablecoins, providing flexible trading options. Additionally, traders can arbitrage the differences in funding rates between different exchanges, further increasing potential profits.
Overall, due to its stable returns, lower risk, and market-neutral characteristics, funding rate arbitrage has become the preferred strategy for many traders seeking stable returns in the cryptocurrency market.
Model One
This model is: Funding rate arbitrage for BTC and ETH in a sideways market
Image 1: BTCUSDT perpetual and BTCUSDT spot funding rate arbitrage; Source: AICoin
Image 2: BTCUSDT perpetual and BTCUSDT spot funding rate arbitrage; Source: AICoin
Model One
Trading Pairs
BTCUSDT perpetual and BTCUSDT spot
BTCUSDT perpetual and BTCUSDT spot
Trading Period
2023/10/24—2023/12/1
2024/02/14—2024/02/26
Trading Amount
20000U
20000U
Fee Rates
Perpetual 0.05% / Spot 0.1%
Perpetual 0.05% / Spot 0.1%
Total Profit
127.82U
55.79U
Annualized Return
8.97%
11.75%
Image 3: ETHUSDT perpetual and ETHUSDT spot funding rate arbitrage; Source: AICoin
Image 4: ETHUSDT perpetual and ETHUSDT spot funding rate arbitrage; Source: AICoin
Model One
Trading Pairs
ETHUSDT perpetual and ETHUSDT spot
ETHUSDT perpetual and ETHUSDT spot
Trading Period
2023/10/24—2023/12/1
2024/02/14—2024/02/26
Trading Amount
20000U
20000U
Fee Rates
Perpetual 0.05% / Spot 0.1%
Perpetual 0.05% / Spot 0.1%
Total Profit
1134.11U
60.46U
Annualized Return
9.41%
12.73%
Model Two
This model is: Funding rate arbitrage for BTC and ETH in a downtrend
Image 5: BTCUSDT perpetual and BTCUSDT spot funding rate arbitrage; Source: AICoin
Image 6: ETHUSDT perpetual and ETHUSDT spot funding rate arbitrage; Source: AICoin
Model Two
Trading Pairs
BTCUSDT perpetual and BTCUSDT spot
ETHUSDT perpetual and ETHUSDT spot
Trading Period
2024/03/12—2024/05/02
2024/03/12—2024/05/02
Trading Amount
20000U
20000U
Fee Rates
Perpetual 0.05% / Spot 0.1%
Perpetual 0.05% / Spot 0.1%
Total Profit
212.11U
249.65U
Annualized Return
11.17%
13.14%
Model Three
This model is: Funding rate arbitrage for BTC and ETH in an uptrend
Image 7: BTCUSDT perpetual and BTCUSDT spot funding rate arbitrage; Source: AICoin
Image 8: BTCUSDT perpetual and BTCUSDT spot funding rate arbitrage; Source: AICoin
Model Three
Trading Pairs
BTCUSDT perpetual and BTCUSDT spot
BTCUSDT perpetual and BTCUSDT spot
Trading Period
2023/10/16—2024/01/10
2024/01/16—2024/03/13
Trading Amount
20000U
20000U
Fee Rates
Perpetual 0.05% / Spot 0.1%
Perpetual 0.05% / Spot 0.1%
Total Profit
353.38U
315.32U
Annualized Return
11.12%
14.88%
Image 9: ETHUSDT perpetual and ETHUSDT spot funding rate arbitrage; Source: AICoin
Image 10: ETHUSDT perpetual and ETHUSDT spot funding rate arbitrage; Source: AICoin
Model Three
Trading Pairs
ETHUSDT perpetual and ETHUSDT spot
ETHUSDT perpetual and ETHUSDT spot
Trading Period
2023/10/16—2024/01/10
2024/01/16—2024/03/13
Trading Amount
20000U
20000U
Fee Rates
Perpetual 0.05% / Spot 0.1%
Perpetual 0.05% / Spot 0.1%
Total Profit
375.99U
285.07U
Annualized Return
11.83%
13.45%
Analysis and Summary
Compare the funding rate arbitrage performance of the three models from different dimensions such as profit performance, annualized return, and market adaptability.
Performance: Model Three provided the highest total profit and annualized return in an uptrend, reflecting the effectiveness of funding rate arbitrage in capturing spread opportunities in a bullish market. Model Two also performed well in a downtrend, especially for ETH, demonstrating the strategy's adaptability in different market environments. Model One showed relatively lower profits in a sideways market, indicating fewer arbitrage opportunities in a market with limited price fluctuations, possibly due to lower volatility, stable funding rates, and cautious market participants in a sideways market.
Annualized Return: Model Two demonstrated outstanding annualized return in a downtrend, especially for ETH, indicating that funding rate arbitrage can maintain high profitability even in a bearish market. Model One showed relatively lower annualized return during a sideways period, highlighting the impact of market conditions on arbitrage strategies.
Market Adaptability: The funding rate arbitrage strategy was effective in different market cycles (uptrend, downtrend, sideways), but the level of profitability and performance was significantly influenced by market conditions. Models Two and Three outperformed Model One, indicating that the funding rate arbitrage strategy has more profit potential in markets with greater price fluctuations.
In summary, the strategy demonstrated strong flexibility and adaptability in different market cycles. In bullish or bearish markets, the strategy effectively reduced potential risks and maintained stable returns. In a sideways market, although the profits were relatively lower, it still provided reliable performance. Traders should constantly monitor changes in market conditions and adjust their strategies to maximize returns.
OKX & AICoin Funding Rate Arbitrage
Currently, OKX strategy trading provides convenient and diverse strategy options.
Arbitrage generally refers to using hedging or swapping methods to profit from the price difference between different markets. Common arbitrage trading methods include funding rate arbitrage, futures-spot arbitrage, and futures-futures arbitrage.
Arbitrage users need to observe two markets in real-time and place orders simultaneously, aiming to have both orders executed as close to each other as possible to avoid slippage. Therefore, OKX provides this strategy tool to assist users in improving efficiency and order accuracy during arbitrage. During actual arbitrage, users can choose suitable arbitrage combinations based on the arbitrage order information provided by the platform. Quick access to OKX arbitrage orders: OKX Arbitrage Orders
How to access more strategy trading on OKX? Users can access the "Strategy Trading" mode in the "Trade" section of the OKX APP or official website, and then click on "Strategy Marketplace" or "Create Strategy" to start the experience. In addition to creating strategies, the strategy marketplace currently provides "High-Quality Strategies" and "Strategies with Copy Traders," allowing users to copy strategies or follow strategy traders.
OKX strategy trading has core advantages such as easy operation, low fees, and security. In terms of operation, OKX provides intelligent parameters to help users set trading parameters more scientifically and offers text and video tutorials for users to quickly get started and become proficient. In terms of fees, OKX has comprehensively upgraded its fee rate system, significantly reducing user trading fees. In terms of security, OKX has a security team composed of top global experts to provide bank-level security protection.
How to access AICoin's funding rate arbitrage strategy? In the AICoin product's left sidebar, users can find "Arbitrage Robot" under the "Strategy" option. After entering this interface, in the "Arbitrage Opportunities" tab at the top, users can choose "Auto Earning Coins," "Forward Arbitrage," or "Reverse Arbitrage" and other funding rate arbitrage strategies. Overview of the low-risk and stable-profit arbitrage artifact: AICoin Arbitrage Overview
Disclaimer
This article is for reference only, representing the author's views and not OKX's position. This article does not intend to provide (i) trading advice or recommendations; (ii) offers or solicitations to buy, sell, or hold digital assets; (iii) financial, accounting, legal, or tax advice. We do not guarantee the accuracy, completeness, or usefulness of such information. Holding digital assets (including stablecoins and NFTs) involves high risks and may experience significant fluctuations. You should carefully consider whether trading or holding digital assets is suitable for your financial situation. For your specific situation, please consult legal/tax/trading professionals. You are responsible for understanding and complying with applicable local laws and regulations.
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