Cryptocurrency arbitrage is one of the most attractive trading strategies

Arbitrage is an investment technique that allows traders to profit from price differences of the same asset across different markets or trading platforms. In the cryptocurrency space, this strategy has gained particular popularity due to high volatility and the availability of numerous trading pairs. Let’s understand what arbitrage is and why it attracts both professional traders and beginners in the market.

Basics of Arbitrage: Three Key Strategies for Crypto Traders

Arbitrage is not a single strategy but a whole system of earning methods. In the digital asset market, there are three main approaches.

First approach — spot arbitrage. The essence is simple: you simultaneously buy an asset on one trading platform and sell it on another where the price is higher. Price differences arise due to data transmission delays, regional factors, or temporary supply and demand imbalances. For example, if BTC costs 45,000 USDT on one platform and 45,200 USDT on another, a careful trader can lock in a profit of 200 USDT per contract.

Second approach — trading on the difference between spot markets and derivatives instruments. Here, arbitrage is a strategy that exploits price discrepancies between the physical asset and its futures or perpetual contracts. When the spread widens between them, you can buy the cheaper asset on the spot market and simultaneously open an opposite position on the more expensive contract, earning on the convergence of prices at expiration.

Third approach — earning from funding rates. This arbitrage involves a system that operates on periodic payments between long and short position holders. When the rate is positive, longs pay shorts. A trader can buy the asset on the spot market, open a short position on a perpetual contract, and receive regular fees.

How Price Arbitrage Works on Modern Trading Platforms

Modern cryptocurrency exchanges provide specialized tools for placing opposite orders simultaneously on different markets. This allows traders to monitor order books and liquidity levels in real time, reducing slippage and increasing execution accuracy.

Automatic rebalancing system. If you place a buy order for 1 BTC on the spot market and simultaneously a sell order for 1 BTC on a perpetual contract, it’s important that both orders are fully executed. Modern platforms use algorithms that check execution every few seconds. If in one direction 0.7 BTC is filled, and in the other only 0.5 BTC, the system will automatically place a market order for the remaining 0.2 BTC to maintain position balance. This is critical because imbalance can lead to unexpected liquidation.

Using multiple assets as collateral. Cross-margin systems allow traders to utilize over 80 different crypto assets as collateral for opening positions. For example, if you have 30,000 USDT as collateral, you can simultaneously buy 1 BTC on the spot (using BTC as margin) and open a short position on 1 BTC perpetual contract, earning fees from positive arbitrage.

Earning from Funding: Passive Income via Arbitrage

Funding rates are periodic payments that long positions pay to shorts (or vice versa). This mechanism maintains market balance, and arbitrageurs can leverage it.

Positive funding arbitrage. When the rate is positive (+0.01% over an eight-hour period), it means longs pay shorts. The strategy is simple: buy BTC on the spot market and open a short position on a perpetual contract for the same amount. Your main position is hedged, but you earn funding fees.

Calculating annual yield. If the funding rate is +0.01% per period, the annual percentage rate (APR) is calculated by summing all rates over three days, dividing by three, then multiplying by 365 and dividing by 2 (accounting for two-way payments). While this may sound complex, modern platforms provide ready calculations.

Negative funding arbitrage. When the rate is negative, the dynamics change: open a short position on the spot and a long position on a perpetual contract. In this case, you will receive fees in the opposite direction.

Step-by-step Guide: How to Start Trading Arbitrage

Placing arbitrage orders is intuitive and takes just a few minutes.

Step one: choose a strategy. Decide whether you will trade on funding or price spread. Review asset rankings — platforms display current funding rates and spreads across various pairs in order of profitability.

Step two: select a trading pair. Choose an asset with an attractive rate or spread. Remember, the amounts on both sides should be equal but in opposite directions.

Step three: determine order type. Decide whether to use a market order (executed instantly at current price) or a limit order (waiting for trigger at your set price). When entering the price, the system will show an estimated profit based on the current spread or funding rate.

Step four: set position size. Enter the amount in one direction — the system will automatically calculate the opposite. Ensure sufficient available collateral to open both positions simultaneously.

Step five: enable rebalancing. Activate the automatic rebalancing feature — this will protect you from execution imbalance. This option is enabled by default and periodically checks whether both sides are filled evenly.

Step six: confirm and monitor. Click confirm — both orders will be placed on the market simultaneously. Track execution in the active orders section, and after completion, review your history.

Risks of Arbitrage and Methods to Manage Them

Despite its attractiveness, arbitrage is not a risk-free strategy. There are real risks you need to understand.

Liquidation risk due to imbalance. If one order executes significantly faster than the other and the system fails to rebalance the position, you may end up with a unidirectional open position. A sharp price movement can lead to liquidation. That’s why the automatic rebalancing function is so important.

Slippage during execution. Market orders are filled at available prices at the moment of placement, which can be worse than your set spread. In highly volatile markets, slippage can wipe out the expected profit.

Liquidity shortage. On low-liquidity trading pairs, an order may take a long time to fill, and the window for arbitrage may close.

No guarantees. Arbitrage is a tool that does not guarantee profit. Platform fees, execution delays, and unforeseen market events can reduce or eliminate profits, or even cause losses.

Risk management: use smart rebalancing, ensure sufficient collateral, avoid low-liquidity pairs, and actively monitor your positions. Remember, you are fully responsible for managing and closing your positions.

Frequently Asked Questions about Cryptocurrency Arbitrage

When is arbitrage most profitable? The strategy works best when there is a significant spread between trading pairs, the market is relatively calm, and liquidity is high. During extreme volatility, risks increase.

How to calculate actual profit? The spread is the difference between the selling and buying price. The spread percentage is expressed in percent. From this percentage, subtract platform fees and funding costs (if applicable) to get net profit.

Can I close positions using arbitrage? Yes, you can use tools for simultaneous opening and closing of positions, which is useful when you need to quickly exit multiple positions at once.

What happens if I disable automatic rebalancing? The system will stop checking execution balance, and your orders will work independently until fully filled or canceled. This increases the risk of imbalance and liquidation.

Why is my order not filled? Usually, the reason is insufficient collateral to open both positions simultaneously. Increase available margin or reduce order size.

What margin mode is used? Modern platforms use cross-margin mode, where your entire collateral serves as security for all open positions, providing greater flexibility.

Why did rebalancing stop? If orders are not fully filled within 24 hours, rebalancing automatically stops, and unfilled orders are canceled to protect against prolonged imbalance.

Conclusion: Arbitrage is a Powerful Tool When Used Correctly

Cryptocurrency arbitrage is a completely legal and effective way to earn, working due to market inefficiencies. However, success depends on understanding mechanics, managing risks, and choosing suitable trading conditions. Start with small volumes, practice in demo mode (if available), and gradually scale up as you gain experience.