For the Perpetual Futures arbitrage, the return on investment is sensitive to the price difference between the future and the underlying asset. A price difference of 0.3% is needed for 10% returns per month (since 1.1^(1/30) ≈ 1.00318), while a price difference of 0.1% only gets 3% per month. I went on Binance and checked the spot price vs. the futures price for a moment in time; it was about $50 difference for BTC, or 0.085%.
So I am convinced that it’s profitable to arbitrage crypto futures; I predict the rate of return for the next 12 months at 10% − 40% (50% C.I.) with a median of 20% per year. There’s a chance of losing everything, but the expected value only decreases by 2% per 1% of losing everything, so as long as you estimate it to be small (<5%) and aren’t betting everything, the risk is manageable.
It seems doubtful to me that the 50% − 100% returns per year that you’ve experienced in the last month will be sustained for a year, and I wonder how it compares to other investments in crypto, both in expected return and in risk profile. Staking Ethereum gets 8% − 12% with little uncertainty, with the caveat that your money is locked up, so one gives up an opportunity cost to chase better investments. Investing in a basket of crypto or specific cryptocurrencies gives ??? rate of return; I think it would have much higher risk and higher returns compared to crypto arbitrage, so higher than the 18 to 20% I estimated for the futures arbitrage in the last paragraph.
In the previous sentence I compared a risky asset to a mostly risk-free arbitrage, and it might seem that’s there’s no principled way to compare the two, with the only commonality being both are in the crypto space. The assumption I make is that traders are willing to pay more for the futures for higher leverage, and that the market is efficient in some way, such that there’s a relation between the expectations of the rate of return of the traders and the price premium they’re willing to pay. So I still find some assumptions of market efficiency useful, even if the concrete statement of the Efficient Market Hypothesis does not hold.
I was quite explicit the current perp trade will only go on so long. You can lever the trade some amount to get to 5 or ten percent. Though there are limits to how much leverage you can use.
Imo you certainly should not compare a low risk investment to a plan that involves going long crypto.
Some random thoughts from a stranger on the Internet:
- The spot-perp difference is expressed as the funding rate (which is the way how perpetual swaps are pegged to the underlying, more long perp ⇒ positive funding ⇒ longs pay shorts ⇒ less longs, except in extra-speculative bullrun like recently). This mechanism has been working so far, because people are successfully massively arbing it!
- Binance has funding rate settlement every 8h, IF you had a constant 0.085%ROI, compounded 3x/day, you would end up with [insert LOT of digits]%/y. In practice, the funding is left-skewed, but not centered on that high value tho :/ (see https://www.theblockcrypto.com/data/crypto-markets/futures/btc-funding-rates for mean apy values)
- It’s basically doing a basis arb (long basis, to be precise), an interest rate arb with a variable rate (you play the yield). Arthur Hayes described it as the “NakaDollar floating rate bond” (see https://blog.bitmex.com/all-aboard/ he has been trading it since 2013, successfully is an under-statement)
-”There’s a chance of losing everything”: long spot/short future, if you don’t leverage it, you’re fully collat! You’re not long crypto, you’re literally delta-neutral
-Opportunity cost? Indeed, it can be quite huge, guess it’s a risk-profile discussion from there
-Comparing to staking : staking is cool, but, in terms of $, NOT delta neutral (you’re long eth!) - if the market tanks, your 12%APY in eth can be worthless (on nakadollar bonds, even if the settlement is most of the time in btc/eth/whatever, your ROI is in $, hence the name). Ofc, dollar-value/inflation comes again into play then...
For the Perpetual Futures arbitrage, the return on investment is sensitive to the price difference between the future and the underlying asset. A price difference of 0.3% is needed for 10% returns per month (since 1.1^(1/30) ≈ 1.00318), while a price difference of 0.1% only gets 3% per month. I went on Binance and checked the spot price vs. the futures price for a moment in time; it was about $50 difference for BTC, or 0.085%.
So I am convinced that it’s profitable to arbitrage crypto futures; I predict the rate of return for the next 12 months at 10% − 40% (50% C.I.) with a median of 20% per year. There’s a chance of losing everything, but the expected value only decreases by 2% per 1% of losing everything, so as long as you estimate it to be small (<5%) and aren’t betting everything, the risk is manageable.
It seems doubtful to me that the 50% − 100% returns per year that you’ve experienced in the last month will be sustained for a year, and I wonder how it compares to other investments in crypto, both in expected return and in risk profile. Staking Ethereum gets 8% − 12% with little uncertainty, with the caveat that your money is locked up, so one gives up an opportunity cost to chase better investments. Investing in a basket of crypto or specific cryptocurrencies gives ??? rate of return; I think it would have much higher risk and higher returns compared to crypto arbitrage, so higher than the 18 to 20% I estimated for the futures arbitrage in the last paragraph.
In the previous sentence I compared a risky asset to a mostly risk-free arbitrage, and it might seem that’s there’s no principled way to compare the two, with the only commonality being both are in the crypto space. The assumption I make is that traders are willing to pay more for the futures for higher leverage, and that the market is efficient in some way, such that there’s a relation between the expectations of the rate of return of the traders and the price premium they’re willing to pay. So I still find some assumptions of market efficiency useful, even if the concrete statement of the Efficient Market Hypothesis does not hold.
I was quite explicit the current perp trade will only go on so long. You can lever the trade some amount to get to 5 or ten percent. Though there are limits to how much leverage you can use.
Imo you certainly should not compare a low risk investment to a plan that involves going long crypto.
Some random thoughts from a stranger on the Internet:
- The spot-perp difference is expressed as the funding rate (which is the way how perpetual swaps are pegged to the underlying, more long perp ⇒ positive funding ⇒ longs pay shorts ⇒ less longs, except in extra-speculative bullrun like recently). This mechanism has been working so far, because people are successfully massively arbing it!
- Binance has funding rate settlement every 8h, IF you had a constant 0.085%ROI, compounded 3x/day, you would end up with [insert LOT of digits]%/y. In practice, the funding is left-skewed, but not centered on that high value tho :/
(see https://www.theblockcrypto.com/data/crypto-markets/futures/btc-funding-rates for mean apy values)
- It’s basically doing a basis arb (long basis, to be precise), an interest rate arb with a variable rate (you play the yield). Arthur Hayes described it as the “NakaDollar floating rate bond” (see https://blog.bitmex.com/all-aboard/ he has been trading it since 2013, successfully is an under-statement)
-”There’s a chance of losing everything”: long spot/short future, if you don’t leverage it, you’re fully collat! You’re not long crypto, you’re literally delta-neutral
- Why such arb still exists (in a not-so efficient market—see https://www.sciencedirect.com/science/article/pii/S2214845020300673 for another piece of your “not sot” argument) ? Because of dollar-value (see Arthur Hayes post supra)
-Opportunity cost? Indeed, it can be quite huge, guess it’s a risk-profile discussion from there
-Comparing to staking : staking is cool, but, in terms of $, NOT delta neutral (you’re long eth!) - if the market tanks, your 12%APY in eth can be worthless (on nakadollar bonds, even if the settlement is most of the time in btc/eth/whatever, your ROI is in $, hence the name).
Ofc, dollar-value/inflation comes again into play then...