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Table of Contents#

What is Binance Smart Arbitrage?
Analysis of the Principle of Futures and Spot Arbitrage
How Does Binance Smart Arbitrage Make Money?
Example of Funding Rate Operation
Example of Binance Smart Arbitrage Operation
How Can Beginners Participate in Binance Smart Arbitrage?
Preparation: Register a Binance Account and Prepare USDT
Steps for Binance Smart Arbitrage Operation
What Should You Pay Attention to When Using Smart Arbitrage?
Advantages:
Risks to Note:
Binance Smart Arbitrage vs Binance Arbitrage Bots: What Are the Differences?
Conclusion

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Binance Smart Arbitrage is an arbitrage tool that allows your idle USDT to potentially generate additional income. It utilizes the establishment of opposite positions in both the spot and futures markets to hedge price risks and earn funding fee income, making it a relatively low-risk arbitrage strategy.

So, what exactly is this smart arbitrage? How intelligent is the operation principle of Binance Smart Arbitrage? This article will provide a detailed introduction on how beginners can participate in Binance Smart Arbitrage.

What is Binance Smart Arbitrage?

Binance Smart Arbitrage is one of the products for "Advanced Coin Earning."

In simple terms, it is an automated arbitrage tool that uses the principle of "futures and spot arbitrage" to earn funding fee income by simultaneously holding opposite positions in the spot market and perpetual contract market.

Users only need to select the cryptocurrency they want to execute and invest USDT; the rest of the operations will be handled automatically by Binance Smart Arbitrage, executing the arbitrage strategy for you.

Analysis of the Principle of Futures and Spot Arbitrage
Literally, "futures and spot arbitrage" can be broken down into arbitrage operations between the "spot" and "futures" markets.

Here, the futures refer to perpetual contracts for cryptocurrencies, and the operational logic is:

Spot Market: Buy a cryptocurrency (e.g., BTC) at the current price in the spot market.
Futures Market: Simultaneously sell an equivalent BTC contract in the perpetual contract market.
What are the benefits of such operations?

By simultaneously holding both buy and sell positions, regardless of whether the price of the cryptocurrency rises or falls, the gains and losses on both sides will offset each other.

This is why we say this is a relatively low-risk neutral strategy, as this operation hedges against the risks of price fluctuations.

How Does Binance Smart Arbitrage Make Money?
Since the impact of price fluctuations is offset, how do you make a profit? The answer is: funding rates!

The funding rate is a special mechanism in cryptocurrency perpetual contracts used to maintain balance between long and short traders, thereby aligning perpetual contract prices with spot prices.

When the price difference between the perpetual contract and the spot price is larger, the funding rate that the majority side needs to pay increases, raising the transaction costs for the majority side and reducing their willingness to trade.

This mechanism balances the gap between long and short positions, bringing perpetual contract prices back to reasonable levels and reducing the price difference with the spot market.

In the perpetual contract market, long (bullish) and short (bearish) traders exchange funding rates every 8 hours (usually executed at 00:00, 08:00, and 16:00).

When the market is bullish, the funding rate is positive, and longs pay the shorts; conversely, when the market is bearish, the funding rate is negative, and shorts pay the longs.

The formula for calculating funding fees is simple: Funding Fee = Position Size x Funding Rate

Example of Funding Rate Operation
Suppose you invest 1000 USDT to go long on the BTC/USDT perpetual contract, and the funding rate at that time is 0.01% (indicating that longs need to pay the funding rate to shorts).

Since the funding rate is charged every 8 hours, assuming the funding rate remains unchanged, on that day your long position would need to pay: 1000 * 0.01% * 3 = 0.3 USDT in funding fees;

Conversely, if you were shorting the BTC/USDT perpetual contract, you would receive 0.3 USDT in funding fees that day.

Example of Binance Smart Arbitrage Operation
Here, we provide a simple example to illustrate how the system will use your funds to help you arbitrage when you invest USDT in Binance Smart Arbitrage.

Suppose you invest 1000 USDT into BTC/USDT smart arbitrage; the system will automatically help you:

Buy Bitcoin worth 1,000 USDT in the spot market (e.g., 0.01 BTC).
Simultaneously sell (short) the same amount of Bitcoin (also 0.01 BTC) in the perpetual contract market.
In this way:

If Bitcoin rises by 10%: the value of your spot Bitcoin increases by 10%, while the perpetual contract loses 10%, and the gains and losses offset each other.
If Bitcoin falls by 10%: the value of your spot Bitcoin decreases by 10%, while the perpetual contract gains 10%, and again the gains and losses offset each other.
After hedging against price fluctuations, the next source of income comes from the funding fees settled every 8 hours.

When the funding rate is positive, because you are shorting the perpetual contract, you receive the funding fees paid by the long side every 8 hours.

For example, if the funding rate is 0.01%, you can earn 0.1 USDT (1000 × 0.01%) each settlement.

What is Binance Smart Arbitrage? How Can Beginners Participate in Binance Smart Arbitrage?

How Can Beginners Participate in Binance Smart Arbitrage?
Now let's look at how to start using Binance Smart Arbitrage in just 3 steps:

1. Go to the "Smart Arbitrage" page in Binance Finance.
2. Select the cryptocurrency and amount you want to invest.
3. Confirm the settings and start the arbitrage.

Preparation: Register a Binance Account and Prepare USDT

Steps for Binance Smart Arbitrage Operation

1. After registration, open the Binance APP homepage and click on [More] here.

2. Click the downward arrow above Finance to find [Smart Arbitrage].

3. The so-called smart arbitrage is essentially term arbitrage, meaning you simultaneously buy a certain cryptocurrency and short that cryptocurrency's contract. In this buy-sell scenario, regardless of whether Bitcoin rises or falls, there will be no gains or losses. If Bitcoin rises, the Bitcoin you bought makes money. Conversely, if you short the Bitcoin contract, you lose money; this gain and loss offset each other, and vice versa.

At the same time, generally shorting Bitcoin incurs a fee called the funding fee. This funding fee is charged every 8 hours and is paid by the majority side of the contract to the minority side. For example, if the market is bullish on Bitcoin, there are more long positions, and every 8 hours, longs have to pay the shorts. Since most of the cryptocurrency market is optimistic, there are usually fewer shorts. This means that shorts can regularly receive this funding fee. Smart arbitrage is designed to capture this funding fee.

If you still don't quite understand the above, that's okay. Binance's smart arbitrage packages this entire process into a product that allows you to use it with one click; you just need to choose the cryptocurrency you want to arbitrage. If you want to arbitrage Ethereum, you can select ETH. On the right, there is an APR, which indicates the current annualized return of the funding rate.

4. This is just the current situation; this return may decrease or increase. Therefore, beginners may find it relatively safer to use mainstream cryptocurrencies. If you want to arbitrage using BTC, just click on "BTC/USDT" here.

What is Binance Smart Arbitrage? How Can Beginners Participate in Binance Smart Arbitrage?

5. The operation method is very simple; you just need to enter the amount of USDT you want to invest. For example, if you want to invest 300 USDT, you can enter 300 here. After entering, Binance will use 300 USDT to buy Bitcoin and simultaneously open a short position on the Bitcoin contract.

It will also display your transaction fees, meaning that when you use smart arbitrage, Binance is simultaneously helping you buy Bitcoin in the spot market, so you will incur a 0.1% spot trading fee. At the same time, you are shorting Bitcoin, so you will also pay a 0.05% fee for the short contract. In total, this is about 0.15%. This means that at the moment you start arbitraging, you will initially incur a loss due to these fees. But don't worry; as long as your smart arbitrage lasts long enough, your funding fees will cover these transaction fees.

Binance is also considerate and will display the suggested minimum holding time, which is about 14 days, for your funding fees to roughly cover your transaction fees. If everything is fine, click [Confirm] below, and Binance will automatically help you execute this term arbitrage.

6. After confirming, you can click on [Assets] in the lower right corner, then click on [Account], where you will see smart arbitrage. Click in to manage it. We generally receive funding fees approximately every 8 hours, but it is not guaranteed every time.

For example, at the beginning, there may also be negative funding fees, meaning that at that time, there were more longs than shorts in the market, causing us to pay money to the longs, and we did not achieve arbitrage. Therefore, the timing of using smart arbitrage is also very important, usually during a bull market, when the market is good, the fees for smart arbitrage will generally be positive.

What Should You Pay Attention to When Using Smart Arbitrage?
Although smart arbitrage is a relatively low-risk tool, there are still some important matters to note:

Advantages:
Automated Operation: Binance Smart Arbitrage provides users with a fully automated operation process, suitable for beginners, and saves time on manual execution of strategies.
Low-Risk Returns: Utilizing the hedging strategy of futures and spot arbitrage to earn funding fees effectively reduces the risks posed by market price fluctuations, making it suitable for beginners.
User-Friendly: Simple settings and intuitive interface, even investors new to cryptocurrency can quickly get started.
Risks to Note:
Funding Rate Fluctuations: The funding rate will change with market conditions; if it turns negative, you may need to pay fees, affecting returns. If the funding rate becomes unfavorable to your profits, the system will issue a warning, and if the situation persists, consider turning off smart arbitrage.
Price Difference Risk: When the market is highly volatile, there may be significant differences between spot prices and contract prices. If you choose to close the arbitrage at this time, you may incur losses due to the large price difference.
Transaction Costs: Each time you execute and close an arbitrage, you need to pay transaction fees; frequent operations may increase costs and reduce overall returns.
Forced Liquidation: In extreme market conditions, forced liquidation may still occur. For example, when there is a huge price difference between spot and contract prices, this risk may arise. Although this situation is rare, especially since the cryptocurrencies chosen for Binance Smart Arbitrage are usually large-cap and less volatile, we still need to be aware of and understand this potential risk.

Binance Smart Arbitrage vs Binance Arbitrage Bots: What Are the Differences?
In addition to Binance Smart Arbitrage, the Binance trading bot page also offers a similarly functioning arbitrage bot.

The arbitrage logic of the two is fundamentally the same, but the main differences are:

Smart Arbitrage: More suitable for beginners, the cryptocurrencies executed are mainly large-cap and relatively low-volatility, thus providing more stable arbitrage returns and lower risks.
Arbitrage Bots: More suitable for experienced users, supporting a wider range of cryptocurrencies for futures and spot arbitrage, providing more profit opportunities. Additionally, it supports both USDT-based and coin-based contracts, offering greater flexibility.

Conclusion
Binance Smart Arbitrage offers a relatively low-risk option for generating passive income in USDT.

Through automated operations and a simple setup interface, it significantly lowers the execution threshold, allowing even beginners to easily participate in futures and spot arbitrage strategies.

Although this is a relatively low-risk operation, there is still a possibility of losses in extreme market conditions or when the product characteristics are not well understood.

It is recommended to thoroughly understand the operational mechanisms and risks of Binance Smart Arbitrage before starting, and to use it according to your investment goals and risk tolerance.

If you have any questions about smart arbitrage, you can check Binance's official documents or seek assistance from customer service.