Mainstream Crypto Derivatives Arbitrage Strategies Analysis From Blofin - Oct

Market Overview

In October, the listing of bitcoin futures ETFs significantly stimulated the enthusiasm of crypto investors, while concerns about liquidity and interest rate hikes kept mainstream cryptos in a state of continuous volatility. Against this background, the returns of all major arbitrage strategies increased significantly compared with September.

Perpetual Contract Arbitrage

Benefiting from the continuous market volatility, the daily average total funding rate of crypto perpetual contracts rose from 0.069% in September to 0.081% in October starting from mid-October, and the overall arbitrage income increased significantly.

• Compared with September, the theoretical monthly return of funding rate arbitrage strategy rose to 1.8756%, with an annual return rate of 24.98%, up 6.24% from September and higher than August, the best performance since the market recovered at the end of July.

• Market volatility has also brought about a significant increase in funding rate arbitrage opportunities. Judging from the utilization rate of funds, the rate of funds continued to rise in mid-to-late October, reaching 0.15% at the end of the month. There are 20 days to adopt full position arbitrage strategy throughout October, while only 7 days to support full position arbitrage in September.

• With the Compound USDC deposit interest rate as the risk-free rate, the annualized excess income in October exceeded 18%.

In terms of cross-exchanges spread strategy, due to the continuous market volatility, the range of cross-exchanges spread has expanded, with theoretical returns and arbitrage opportunities the highest since July.

• In October, the BTC intra-day spread arbitrage strategy based on the Binance-Bybit exchange pairs rose to 1.3810% (17.89% annualized) compared to September, and the ETH inter-exchange spread arbitrage rose to 1.7265% (22.80% annualized), similar to the increase in perpetual contract arbitrage.

• Taking into account such factors as handling fees and transaction costs, if investors think about 0.03% spread as the entry line, the arbitrage opportunity in October is still amazing. Except for the beginning of October, BTC has 25 days to achieve arbitrage gains, while ETH has higher volatility rate which makes it possible to open positions for arbitrage throughout October, and the overall income is also higher than that of BTC.

For altcoins, the continuous positive basis in October made their average return under high volatility exceed 2%, reaching 2.6167% (annualized 36.34%), higher than the funding rate strategy return 0.74% (annualized 9.27%), and the risk-return ratio reached the ideal level. With 0.05% basis as the entry line, altcoin basis arbitrage strategy was supported for more than 80% in October.

Futures Arbitrage

In October, influenced by macroeconomic factors and stimulated by good news, the price of mainstream cryptos is expected to rise further, with the daily average basis change of delivery contracts rising to 2.62%, up 0.85% from 1.77% in September, and the monthly income reaching 81.24%, far exceeding the income of other derivatives arbitrage strategies. Even considering the actual trading conditions, the futures arbitrage strategy still achieved its best performance in October.

The high premium rate of crypto futures remained high and stable after reaching its peak in October. The annual premium rate of futures in all mainstream exchanges exceeded 10%, ensuring the continuous profitability of the futures arbitrage strategy.

Market Trends in the Short and Medium Term

• The support of crypto prices from anti-inflation demand is expected to continue until the end of 2021Q4. With the demand for cryptos remaining at a high level, the high returns of major derivatives arbitrage strategies are expected to continue steadily in the short and medium term.

• Although the interest rate resolutions and economic policies of various countries in early November started the pace of global liquidity contraction, in order to avoid causing high market fluctuations, the overall strategies are relatively mild and the impact on the crypto market is expected to be relatively small in the short term.

• With the end of debt reduction in various countries next year, the following interest rate hike process will significantly affect investors' pricing of risky assets, causing the price and market value of cryptos to shrink to a certain extent. For strategies based on derivatives markets, liquidity reduction may have adverse effects on arbitrage returns, but for strategies based on options and other products, the impact is relatively limited, and more income opportunities may be obtained due to new risk hedging needs brought about by market liquidity changes.