FTX has been exposed as a fraud and is now bankrupt. I have lost my funds on FTX, although I withdrew most of it before the collapse. I owe it to myself to reflect deeply on this event. I also owe it to my readers because I wrote 2 positive articles(1, 2) on FTX in the past. I was not paid a single cent for writing the articles. I wrote them on this financial blog because I was a happy customer of FTX.
Some people gloat over the investment losses of others. Some people get resentful when others are profitable. I do not wish to indulge either group. Hence, I do not wish to talk about how much I eventually made or lost from FTX. This information is relevant only to me. The important content is the lessons to be learnt from this disaster.
Why was I so enthusiastic about FTX? My experience with FTX has been wonderful until the fraud unravelled. I was making a stable income on the FTX platform in the bear market of 2022 when every asset class lost money. I confess I am a selfish person. I cannot reveal in detail how I did it on FTX when the strategy was still working to avoid returns from being driven down. I do not mind revealing it now since FTX is gone.
How I made a stable income from FTX in 2022
Previously, I wrote favourably about the lending feature of FTX. Users can enjoy good yields by lending out their crypto assets on FTX. However, this alone is not enough to provide a stable income. You can lend out for 20% yield but if the crypto asset crashes 50% (and most did in crypto winter 2022), you will still sustain heavy losses. To solve this problem, I shorted the underlying crypto assets through perpetual futures on FTX. This way, I will not lose money regardless of whether the cryptocurrencies are moving down or up. This strategy is known as delta-neutral trading. It is common knowledge. Nothing special here as most crypto traders knew about it.
The secret ingredient was FTX.US
FTX.US had consistently higher lending rates for some crypto tokens than FTX.com. I think this market inefficiency existed because Americans had difficulty accessing perpetual futures due to regulatory restrictions. Many non-Americans are not aware of FTX.US because they thought it is mainly for Americans. The crypto offerings at first glance are inferior to what is available on FTX.com. Many non-Americans will not take a closer look.
To find out which are the crypto tokens with high lending rates on FTX.US, I wrote software using FTX API to monitor the lending rates on FTX.US
After identifying the tokens, I bought them in the spot market and shorted the equivalent amount with perpetual futures on FTX.com. The tricky part about shorting perpetual futures is the funding rate. When the funding rate is negative, shorts have to pay. When the funding rate is positive, shorts get paid. A good situation is when the delta-neutral trader gets paid for both lending out the spot tokens and shorting the corresponding perpetual future. Unfortunately, in the crypto bear market of 2022, most perpetual futures traded with negative funding rates because shorting is more prevalent in bear markets. To identify the tokens that traded with favourable funding rates for shorting, I wrote this software to monitor funding rates on FTX.com.
When the funding rate gets too negative to the extent that the delta-neutral position starts to lose money, I will unwind the position. This in and out action can lead to high commission. Fortunately, FTX has this promotion that reduces maker fees to zero if the user staked enough FTT tokens (I lost all the staked FTT when FTX collapsed). In other words, if I place a limit order and wait for the order to be filled, the fee paid is zero.
The trickiest part I faced in the delta-neutral strategy was executing the trades to enter and exit the positions. To take advantage of zero maker-fee orders on FTX, I had to place limit orders and wait for orders to be filled. I had to determine whether I should buy first, then sell or sell first, then buy. Sometimes I made and sometimes I lost. I am no longer able to access my FTX account, so I cannot find out whether I made or lost in the end from these executions. I enjoyed the market challenges and gained some day trading experience(Day trading is something that I would not recommend to most people) as a result.
FTX did not charge fees for withdrawals unless they took place on Ethereum blockchain. I was able to move tokens free of charge between FTX.com and FTX.US using the Solana blockchain.
When I could not find good trades for the delta-neutral strategy on FTX.com and FTX.US, I will place my USDC stablecoins in Blockfolio app to earn 5%-8% yield in the FTX Earn programme. Funds in Blockfolio can be withdrawn at any time when I spot delta-neutral opportunities.
In a bear market year when all asset classes fell, low-risk income from delta-neutral trading was a godsend until the FTX fraud unravelled.
I will stop here for the moment. In part 2 of the article, I will cover my self-reflections on the FTX fiasco.
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