Path to Advanced Contracts (Arbitrage Section)

1. Spot contract hedging is the main method for large funds to hedge risks. Perpetual contracts incur funding fees three times a day, which creates arbitrage opportunities. The simplest method is to find two exchanges for the same cryptocurrency with significant differences in funding fees. Open a short position on one with a positive and relatively large funding fee, and a long position on the other, keeping the opening price, margin, and leverage the same, thus forming a hedge and earning funding fees. Regarding leverage, 5-10 times is preferable; higher leverage risks liquidation, while arbitrage requires long-term earnings from funding fees, and frequent position adjustments incur high transaction fees. Lower leverage results in low capital utilization.

2. Regarding leveraged contract arbitrage, to increase capital utilization, leverage can be added to spot trading. Taking U-based as an example, the daily interest rate for borrowing U on exchanges is generally 0.02%. If the total daily funding fees for contracts exceed 0.03%, there is profit potential (during bull markets, this is generally greater, while in bear markets, it may turn negative). OK's unified account allows shared margins, enabling higher leverage without frequent position adjustments, but as more arbitrageurs enter, funding fees will not remain too high. Recently, I used 10,000 U leverage to buy 1 BTC on Gate exchange, with U automatically borrowed. On BigOne exchange, I opened a short position on BTC/U perpetual contract at X10 (with 10,000 U margin) for 1,000 contracts (equivalent to 1 BTC), with daily funding fees of 0.1-0.2%. The contract is set with a stop-loss, and leverage is set with a take-profit. Finding cryptocurrencies with high funding fees relies on personal research; some trading software can help, and I’ve encountered funding fees as high as 6%.

3. Regarding risks, the first is slippage; the buy and sell prices on both sides may not match. Generally, with limit orders and no significant market fluctuations, this won’t occur. If buying at a low price with leverage and opening a short at a high price, one can still profit from the price difference. Setting the leverage sell order price slightly above the contract stop-loss price can also reduce slippage.

The second risk is loss. Generally, during upward movements, sales occur at the set price, preventing losses. However, rapid price corrections can trigger forced liquidation at the leverage price, while contracts may also be forcibly closed for profits, which can lead to losses. Therefore, during significant corrections, it’s advisable to close positions in advance to prevent losses.