Today I will talk about funding rate arbitrage under extreme situations. This article is an extension of funding rate arbitrage, assuming the reader has mastered the funding rate arbitrage methods. If not, you can read the first article in the series.
For an introduction to funding rate arbitrage, please see this article
In general, arbitrage under extreme conditions can often yield high arbitrage returns (of course, the risk will also slightly increase), especially during a bull market where extreme situations occur more frequently. In extreme situations, there will generally be capped rates or more frequent settlement times (usually every 2 hours or every 4 hours). Therefore, this is definitely something that arbitrageurs cannot afford to miss.
Next, we will explain directly through two cases 👇
🌕 Case One - GFT
Binance recently delisted the GFT token citing security issues with the contract. Following that, the GFT team also stopped pretending and directly issued 120% more tokens on-chain and flooded them into major exchanges.
For details, you can check the tweet from on-chain detective Zach:
https://x.com/zachxbt/status/1861978997376069918
This action directly triggered a collapse in GFT's price, halving it, thus bringing this token to an extreme situation.
However, the magical part is that after hitting a certain low price, there surprisingly appeared a buyer who bought this token back to the top of the gainers list! Because it wasn't bought evenly across exchanges, this led to price differences and rate differences across various exchanges.
Among them, the most outrageous is Bybit and OKX. A huge rate difference appeared starting from 4 PM on the 29th.
At its peak, it reached 4.5%. This means that one arbitrage could yield a rate as high as 4.5% before accounting for slippage!
As of now, at 11:50 AM on December 1st when I am writing this, there is still a 1.2% rate difference. If the triple leverage continues until the contract is delisted, it is estimated that there will be a gross return rate of 15-18%, which after accounting for slippage is 8-15%.
In less than three days, extreme situations can allow large amounts of capital to achieve returns of 8-15%, which is a very frightening thing. Of course, it is also unpredictable and requires paying close attention to on-chain data.
⚠ Risk Warning
Although funding rate arbitrage carries very low risk, it does not mean there is none. The main risk in this situation is the price difference when opening positions between exchanges. When I was operating, I actually saw a significant price difference between two exchanges; however, after calculating the expected return, I felt that I could recover the losses from the position price difference using funding rates, so I went long at the peak and short at the bottom. In fact, after my first arbitrage, there was a 10-20 minute window where I could close both positions at the original price difference, but due to lack of experience, I missed this opportunity to escape, leading to a price flattening later, which increased my slippage and reduced this return rate. Therefore, funding rate arbitrage in extreme situations heavily relies on experience; it is recommended that beginners use small amounts of capital for one or two months before gradually increasing their investment.
🌕 Case Two - During the Luna Crash
Luna collapsed from over $100 to around $0 during an extreme situation, with rates reaching a capped 2% and settling every two hours!
Due to the time elapsed, I couldn't find a screenshot, but a simple calculation reveals:
The collapse lasted for about one to two days, and according to this rate, the daily arbitrage return rate would be 12*2%/2=12%, which is a very frightening return rate that can accommodate large capital.
For the Luna crash at that time, if you were too afraid to take on high risk for shorting directly, then funding rate arbitrage is a very good method to obtain stable high returns in extreme situations.
🌕 Summary
Extreme situations are always unpredictable, but once they occur, many high-return opportunities arise. Only by understanding these methods in advance can one seize the next opportunity.
I am Dylan, and if you want to see me write more related content, feel free to like, comment, and support. Finally, I wish everyone can get rich in the bull market!