Ultra-low risk return strategy - Cryptocurrency Funding Fee Arbitrage

Only need to understand two concepts.

Concept 1: Funding fee
Concept 2: U standard/coin standard

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Funding fee: The funding rate is the exchange’s purpose to maintain a balance between the contract price and the underlying asset price The rate charged or paid to position holders for the difference. It is difficult to understand when reading, but you can intuitively understand that this is an adjuster that adjusts the price difference between spot and contract prices.

The funding fee rate can be positive or negative. The final value is confirmed by the exchange through algorithms and is a value that changes in real time. Pay three times a day according to the current node rate value (00:00, 08:00, 16:00).

Positive funding rate, those who are long will pay those who are short.
Negative funding rate, short sellers will be charged for long positions.

Our arbitrage strategy is to earn this fee. Statistics show that there are many more people who are long than short in the cryptocurrency market. As a result, the funding rate is positive all year round. The following figure shows the statistical data of funding rates in the past year:

Annualized data of funding rates for each exchange

Since there is a positive expected return from this funding rate, we can do the following strategy:

Divide the cash on hand into two parts, each with 50%, one part will buy more spot goods, and the other part will Buying the contract of the corresponding product is empty and no leverage is added. For example: 100,000 RMB, 50,000 RMB to buy ETH spot (spot can only be long), 50,000 ETH/USTD contract to open short. At the same time, set a profit stop of 95% to close the position for spot ETH, and set a 95% loss close for the short contract. With such a configuration and a hedge, we have no risk no matter whether ETH rises or falls. A short contract of 50,000 yuan will contribute 33% of annual capital fee income to us. Take the OKX exchange pictured above as an example.

This hedging strategy ignores any fluctuations, pins, shocks, and big and small fluctuations. Note that for capital fee arbitrage, it is best to use mainstream stablecoins: such as Big Pie, Auntie, SOL, and XPR. Don’t get involved with altcoins.

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After finishing the strategy logic, let’s talk about the concepts of U standard and currency standard.

"U standard" and "coin standard" are two different pricing methods.

U standard (Unit of Account) :
U standard refers to using a specific currency unit as the unit of measurement, and the value of other objects is expressed relative to this unit. In the cryptocurrency market, USDT is the pricing unit of all currencies, referred to as U standard. For example, a BTC/USDT contract is 70,000 USDT.

Currency of Account：
Currency standard refers to using a certain currency as the unit of account. Most spot virtual currencies in the cryptocurrency market can be used as the unit of account. It is common. The ones are BTC and ETH. For example, a BTC/USDT contract is 1 BTC.

The purpose of mentioning these two concepts is to explain: arbitrage can be done using U-standard contracts or currency-based contracts. The arbitrage strategy we mentioned earlier is U-standard contract arbitrage.

The capital utilization rate of currency-standard contract arbitrage is higher than that of U-standard.
Judging from the data in the figure below, there is a high probability that the U-standard funding rate of major exchanges is higher than that of currency-based

exchanges, Comparison of U-standard and currency-standard funding rates

Overall, the annual rate of currency-standard funding fee arbitrage is higher than that of U-standard, mainly because of the high capital utilization rate.

Why is the capital utilization rate of currency-based arbitrage high?

In the previous strategy, the principal of 100,000 was divided into two parts for arbitrage. In fact, only the short contract of 50,000 generated arbitrage income, and the capital utilization rate was 50%.

As for currency-based arbitrage, we can buy the spot with all 100,000 principal, and then pledge the spot to buy a short contract of 100,000. Risk-free arbitrage can also be made, and the capital utilization rate is 100%.

Another advantage of the currency standard is that it can ignore the exchange rate fluctuations of U itself. The disadvantage of currency standard is that the operation is complicated.

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Operation method, the following screenshot takes the U-based operation of the OKX Exchange ETH contract as an example. In fact, the operation is not complicated, but few newbies pay attention to this function.

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