Investment BitMEX, Deribit, ByBit Cryptocurrency Funding: What It Is & Can We Earn Via Arbitrage?

hi folks and welcome to this next video in our series on how to earn through arbitrage and how different arbitrage models work and how we can automate them and create a revenue streams for ourselves and for our clients my name is Jared I’m chief liquidity officer for coin mechs lives and who are coin next lives and how who are we and how can you try a free trial a free trial actually is right now on hold while we create our market maker into a more strong offering so the lengths to be the video on how you can take part in the trial or join our discord is below but let’s take a look at the current flavor of the ball and how it’s been performing since we took time to concentrate on the core offering and and deliver a more stable and risk-averse spot if we take a look at the all time frame on this chart you can see that the green line here which is the Bitcoin US dollar returns and the black line which is the US dollar returns have been increasing significantly over time and even though we nearly had 0% returns on US dollars is now up it was up about 5% now it’s around just about 4% or four and a half percent meaning that we will have our market maker again able to deliver for you in the near future so today we’re gonna look at professional funding and perpetual contracts on bit mechs and they’re a bit and by bit and all these other exchanges what they are why it works the way it does and how we can earn to arbitrage so what is a professional contract well if we take a look at their but we’re gonna see some contracts that are basically like [Music] traditional financial instruments which expire in the future as the price as the business between the time in the future and now becomes shorter the price comes closer and closer to the mark price of the or the the spot price for that for that underlying symbol or item or in a you know in these cases big coin so these two contracts expire on June 26th and September 25th as you can see the prices aren’t exactly the same they’re a little bit less in each case than the perpetual contract and all the professional contract is is it’s a futures contract that never expires it’s made possible through blockchain wonders and basically instead of having this different price from from the spot price that converges over time we now have an instrument funding apparatus that’s put into effect so if we take a look at bit max we can see that if the price diverges from the market price significantly the funding rate goes up or down according to whether or not we want to bring the price back up or down to meet the spot price so right now the funding rate is negative 0.08 percent meaning that in an hour and six minutes those shorts or the people that are that are currently selling or betting with the price will go down they’re gonna pay a percentage of their of their holdings to the people that are longing but that contract meaning that basically it’s gonna incentivize people to to be long on that contract and to hopefully bring the price back up so if we take a look at the Bitcoin price of the professional which is six seven six two we should see that let’s give a look here we should probably see that that future price for the perpetual is below the mark price and we could probably find that out by grabbing the instrument data from the API and indices I guess no we don’t need anything bases so if we tried this API call here we’re gonna find our active symbols so this is the the Bitcoin US dollar perpetual contract if we look for a mark price now let’s just copy all this stuff or we’re gonna see the market price is six seven six eight and we said that should be above the price for the perpetual product contract but not by much it looks like it’s fairly converged so it looks like the funding has actually worked in this price in this in this instance because the prices converged on the mark price which is good news which means we should see in the next funding rate do we have predicted funding rates no we don’t have the predicted funding right I wonder if I can find the particular funding right so that we should see the next funding rate for the next eight hour interval interval should be less than this funding ring it looks like we don’t get the actual next funding rate often next from the API which is fine either way we see that the funding rate has worked and the the price of the professional has come closer to the mark price over that last seven hours since the last funding happened now we can check back in an hour to see whether or not my hypothesis is true and see whether or not our funding rate is going to be less than zero point zero zero eight so funding rates bring convergence in perpetual features see the market price which is the underlying price now that’s basically it that’s how it works that’s why it does what it does now how can we earn and through arbitrage well let’s say we have more than one exchange let’s say we have one exchange where the shorts are paying along 0.01 let’s say we have one exchange where the lungs are paying the shorts rather the guy the lungs are paying the shorts point zero zero two while in this case we can see that if we were to take a long position on the first exchange and a short position on the second exchange both of them would be earning and one would be earning high twice as much so the difference in those is this much so we’d be earning this much percent on an eight-hour period on most of these exchanges some of these exchanges like FDX and arabic quote their rates in 24-hour periods so it’s best to multiply then I would into daily rates to compare and we can take a look at what this looks like in real time with a bot that I’ve created which chucks dared it and by bit and bit Max and we’ll see that the rate on bit Max is three times the rate that we just saw quoted on the interface so we saw 0.8 percent which is 0.008 in decimal zero zero zero eight in decimal if you multiply that by three to get a daily rate we’re gonna get negative 0.02 or 0.2 percent on a daily dare bit is set at zero right now for both ether and Bitcoin and by bit on Bitcoin is 0.01 0.001 or 0.1% where the shorts are paying the lungs which means that we’d want to long bit mix that example for Bitcoin or for ether good one along by bit because the private raid on Uther is higher than the business rate which is actually looks like we want to short bit max for ether but the by bit rate is more extreme so if we were to compare the two based on the value difference between themselves in absolute zero we’d see that we would be more we get paid more if we were to sorry if we were it’s a long by bit in this example and then if we short bit Maxon just ignore their bit we’d earn even more so basically what that means is let’s say we had ten hundred thousand dollars on let’s say we had a hundred thousand dollars total I’m saying worth we’ll say so in this case what I want to do because this one’s shorts paying Long’s half as much as long as it paying shorts we’d want to short back that balance so fifty thousand dollars 33 says well you’re gonna short the third of that balance and we’ve won along two thirds that balance to maximize our income but what we could possibly do is actually only go half and half and that way we wouldn’t be exposed to any upwards or downwards movement in the price because you shorter than Long’s exactly the same amount on these two different professors contracts but should stay around the same mark price and so we won’t see any upwards or downwards movement because we’re perfectly hedged and now we can arbitrage the rates and what will we earn in this case oh we learned five bucks and ten bucks over here dollars let’s look what that looks like with the actual rates that we saw from the API but either so if we were to short knickknacks and long by bit and this is using real numbers from the actual exchange as it is so we belong with hyper balance in short with a prevalence let’s say the end $50,000 each which is in a far cry for some investors institutional retail what would get is every eight up this is actually daily rates here so every day every would get a third this they okay so for its multiply this out but you guys gosh well we’re holding to get seventy dollars and 35 cents for free just from the funding and we’d weigh that against our bit mix shorts which you’re gonna pay s $10.50 so now we’ve just earned 27 dollars and 85 cents from basically not having any exposure or any risk and perfectly balancing our shorts versus our Long’s and earning on that funding difference with honor back bars so again what was that by the day twenty seven eighty five to seven twenty five times three assuming the race didn’t change throughout the day that’s 85-83 third fifty-five every day which is zero point zero eight three percent Thursday it’s not actually that much but you’ll see that these rates are actually very very low and you’ll see that in the future these rates can sometimes go kind of extreme it looks like I’ve broke the bit next clock because it shouldn’t say 24 hours for funding here it should be 56 minutes but you’ll see that this rate is actually very very small and over time you’ll see a higher rate and we’ll have more arbitrage opportunities but even if you have 0.08 percent daily that’s 30% APR which is kind of fantastic for having absolutely no risk and if you were to create an average charge but surrounding this you can create minimum thresholds to do this you could also look at what we’re talking about in other videos which is the convergence of futures arbitrage cash-and-carry arbitrage you give actually way you’re pairing opportunity versus and always earn as much as you could given the difference and that’s basically that so you have the opportunity to earn 30% annual percentage yield every single day just for holding these currencies perfectly as you can see that each other like I said so that a price up or down doesn’t affect anything and you just earn the funding amounts Aarti that’s basically that thank you so much and give us a like and a follow and a share