Mainstream Crypto Derivatives Arbitrage Strategies Analysis From Blofin -Mar

Market Overview

Compared with February, the negative impact of the conflict in Eastern Europe and the Fed's interest rate hike has gradually been priced by the market. As a result, the performance of the crypto market rebounded in March, especially in late March.

Affected by this, the earnings of mainstream crypto arbitrage strategies have recovered, but altcoin-related strategies have not yet met the minimum requirements of opening positions. For option strategies, the selling volatility strategy had a statistically significant advantage in March, benefiting from the sharp drop in market volatility after the interest rate hike in March.

Perpetual Contract Arbitrage

Before and after the announcement of the Fed's interest rate hike, the long-suppressed bullish sentiment in the crypto market was finally released, which made the funding rate arbitrage strategy return a statistically significant rebound.

Compared with February, the funding rate arbitrage return in March rebounded to more than 0.3%, with an annualized return of 3.68%, the best level since the beginning of 2022. With the Aave USDT deposit rate as the risk-free interest rate, the funding rate arbitrage strategy can obtain an annualized excess return of about 1.18%. Considering that the crypto market is still in a bear market stage, the return performance of the funding rate arbitrage strategy is fair.

Similarly, thanks to the rebound in bullish sentiment, the operating of the funding rate strategy has also improved compared with last month. Although the current market sentiment still cannot support the strategy's full position operation, in the second half of March, the strategy can meet the half position operation requirement most of the time, while the minimum operation requirement is met at other times. The situation that the position cannot be opened did not occur.

However, altcoins have not benefited from the short-term rebound in the crypto market, and the negative basis of perpetual contracts based on altcoins continues. Although the basis of some altcoins rebounded to more than 0 at one time, it still did not meet the minimum arbitrage requirements, so altcoins-related strategies were still difficult to operate in March.

Compared with the above strategies, the cross-exchange spread strategy continued its good performance since the end of 2021. In March, the monthly return of the BTC cross-exchange spread strategy reached 2.4% (annualized about 32.89%), while the monthly return of the ETH cross-exchange spread strategy reached 2.78% (annualized approximately 38.99%), slightly higher than the level of February.

The cross-exchange spread arbitrage strategy can still maintain full operation if the spread is ≥ 0.03% as the opening position standard. It is not difficult to find that the cross-exchange spread strategy is better to ensure the income level during a bear market.

Futures Arbitrage

The short-lived price rebound of crypto assets also raised the expectations of futures investors for the market's forward performance. As a result, the negative basis of futures ended around the middle of March, and the basis rebounded to more than 1.1% at the end of the month.

However, compared with the previous, the average daily basis of futures is still only about 0.55%, and it is still difficult to obtain excess returns. In addition, as the price rebound ends and the futures' basis begins to fall back, the performance of futures arbitrage strategy is expected to continue to be inferior to the cross-exchange spread strategy.

Market Trends in the Short and Medium Term

Although short-term sentiment changes in the crypto market can drive the rebound in crypto asset prices to a certain extent, the long-term price decline caused by liquidity contraction is difficult to change. In addition, due to the further increase in global inflationary pressure, central banks led by the Federal Reserve are further increasing the rate of interest rate hikes and considering measures such as balance sheet reduction to speed up the liquidity contraction process. Consequently, the crypto market may be under further pressure.

Considering the current low volatility characteristics of the crypto market, a moderate decline may become the theme before the announcement of the Federal Reserve's decision in May. As investors continue to lower their future price expectations in the continuous decline, the earnings of the single exchange arbitrage strategies may narrow again. In contrast, the liquidity contraction has brought new opportunities for cross-exchange arbitrage strategies, and its performance may surpass other arbitrage strategies during the stable bear market.