Arbitrage Trading Strategy on Cryptocurrency Exchanges: Essence, Methods, and Applications

Arbitrage trading is an investment approach where traders profit from price differences of the same asset across different markets or trading instruments. In the modern cryptocurrency industry, arbitrage trading has become one of the most attractive strategies for earning income, especially with the development of specialized platforms and tools.

The main types of arbitrage trading include three directions: spot arbitrage (buying and selling on the same market), funding rate arbitrage (exploiting differences between the spot market and perpetual contracts), and futures arbitrage (taking advantage of price discrepancies between contracts with different expiration dates).

How Arbitrage Trading Works on Crypto Platforms

Arbitrage trading functions as a specialized trading tool that allows market participants to monitor price dynamics and liquidity across two trading pairs simultaneously, then quickly place orders in opposite directions. The main advantage of this approach is the ability to respond rapidly to short-term market opportunities without delays typical of sequential trading.

The system provides an optimized order execution process with increased accuracy. Traders access a unified screen where they see the full picture of price movements and order book depth for both positions simultaneously. This minimizes slippage and enables more favorable trade execution.

Two Main Strategies: Earning from Funding and Price Discrepancies

The first arbitrage strategy is based on utilizing funding rates. When the perpetual contract rate is higher than the spot price, the difference is financed through periodic payments between long and short positions. During such periods, a trader can buy the asset on the spot market, simultaneously open a short position on the perpetual contract, and earn from these payments. This is called positive arbitrage. If funding flows in the opposite direction, the strategy is inverted: selling on the spot and opening a long position on the contract.

Example: suppose the perpetual contract BTCUSDT has a positive funding rate of +0.01%. In this case, long positions pay short positions. The trader can buy 1 BTC on the spot market and open a short position for 1 BTC on the perpetual contract. If the BTC price remains unchanged, the trader profits solely from funding payments. Hedging protects the position from price fluctuations.

The second strategy focuses on exploiting price spreads between different trading venues or instruments. If the BTC price on the spot market is lower than the price of the BTCUSDC futures contract, the trader can buy BTC on the spot and simultaneously sell the futures contract. When the contract expires, prices converge, and the trader realizes profit from the difference. This strategy relies on the convergence principle: the futures price should always align with the underlying asset’s price at contract expiration.

Available Trading Pairs and Requirements for Arbitrage Trading

Arbitrage tools become available after activating the Single Trading Account (STA) mode with cross-margin. Currently, platforms support three trading pair combinations for arbitrage:

• Spot (USDT) and perpetual USDT contract
• Spot (USDC) and perpetual USDC contract
• Spot (USDC) and USDC futures contract

The system allows using over 80 different assets as collateral. This means a trader holding, for example, 1 BTC valued at 30,000 USDT, can use it as margin to simultaneously open a spot position and a perpetual contract position of the same size. This flexibility enables more efficient use of available capital.

Key Platform Features for Arbitrage Trading

The platform offers several tools that greatly simplify arbitrage trading:

Scanning Opportunities. The system automatically scans all available trading pairs and ranks them by funding rate or spread. Traders see in a single list which pairs currently offer the most favorable conditions—either the highest funding rate for passive income or the largest spread for profit from price differences.

Simultaneous Order Placement. Instead of placing two orders sequentially (which can lead to partial fills or slippage), traders can place them with one action, ensuring that the number of contracts filled in both directions remains balanced.

Smart Rebalancing System. This feature (enabled by default) checks every 2 seconds how many orders have been executed in each direction. If an imbalance occurs, the system automatically places a market order to balance the positions. For example, if 0.5 BTC is filled on the spot, but only 0.4 BTC on the contract, the system will add a market order for 0.1 BTC on the contract. This automation operates for 24 hours, after which unfilled orders are canceled.

Extended Collateral. With over 80 assets approved as collateral, traders gain greater flexibility. If the spread between spot and futures widens, they can use the asset itself as collateral to open an opposite position, thus avoiding liquidation risk during price fluctuations.

Risks in Arbitrage Trading

Although arbitrage is considered less risky than directional speculation, it still involves certain threats that must be understood.

Partial Fill Risk. If an order in one direction is fully executed but only partially in the other, a position imbalance arises. This can lead to liquidation risk if one side remains uncovered. To mitigate this, it is recommended to keep the smart rebalancing enabled.

Slippage During Rebalancing. When the system automatically places a market order to balance, the price may deviate from the initially expected level. This is especially noticeable in markets with low liquidity.

Active Position Management Remains with the Trader. The tool helps place orders but does not automatically manage their lifecycle. Traders must monitor positions, close them timely, and control margin levels to avoid liquidation.

Liquidity Shortage. During periods of low trading activity, orders may execute slowly, disrupting the balance of positions.

Step-by-Step Guide to Placing Orders in Arbitrage Trading

Preparation. Ensure your account is switched to the Single Trading Account (STA) mode with cross-margin. The standard margin mode for arbitrage trading is unavailable. Go to margin settings and activate STA.

Choosing a Trading Pair. On the main trading interface, find and open the “Arbitrage” section. The system displays all available trading pairs, ranked by funding rate or spread. Select the pair that matches your strategy: high funding for passive income or significant spread for active profit.

Determining Direction. Decide whether to open a long or short position on the first trading pair. After selection, the system automatically sets the opposite direction for the second pair. The amount in both directions always remains equal.

Order Type and Size. Decide whether to use a market order (immediate execution) or a limit order (execution at a specific price). When entering a limit price, the current funding rate or spread is displayed next to the pair, helping assess potential income. Specify the order size—filling one direction automatically applies the same size to the other.

Activating Rebalancing. By default, smart rebalancing is enabled. Although this can be turned off, it is recommended to leave it active so the system automatically corrects execution imbalances.

Confirmation and Monitoring. Click “Both Steps” to place orders simultaneously on both markets. After confirmation, go to the “Active” section to monitor execution. Once orders are fully filled, view details in the “History” section.

Managing Positions and Assets. After order execution, spot assets are visible in “Spot → Assets,” and contract positions are shown in “Perpetual Contracts and Futures → Positions.” Funding income can be checked in your STA transaction log.

Calculation Formulas and Metrics for Profitability Assessment

To make informed decisions about starting arbitrage trading, traders should be able to calculate key indicators:

Spread (absolute value) = Last sale price of the sold ticker − Last sale price of the bought ticker

Relative spread (percentage) = (Last sale price of the sold ticker − Last sale price of the bought ticker) ÷ Last sale price of the sold ticker

Annual Percentage Rate (APR) of funding = Total funding rate over 3 days ÷ 3 × 365 ÷ 2

Total funding rate over 3 days = sum of all funding rates over all intervals in the last 72 hours

Annual spread rate = Current relative spread ÷ Maximum contract duration (days) × 365 ÷ 2

Maximum period = number of days until futures contract expiry

These calculations help compare different opportunities and select the most profitable arbitrage options.

Frequently Asked Questions About Arbitrage Trading

When does it make sense to place arbitrage orders?

Arbitrage trading is effective in scenarios such as:

• When there is a significant spread between trading pairs, allowing locking in profit and protecting against slippage during sequential trading.
• When trading large volumes or when rapid market response is required, simultaneous order placement helps manage costs and reduces price impact during execution.
• When implementing complex multi-step strategies or closing multiple positions simultaneously, arbitrage ensures synchronized execution across markets, preventing missed opportunities.

Can arbitrage be used to close existing positions?

Yes, the tool fully supports both opening and closing positions. This allows for more elegant exit strategies with better synchronization.

Does arbitrage work on sub-accounts?

Yes, if a sub-account is activated in STA mode, it has full access to arbitrage tools.

Is arbitrage available in the simulator (demo mode)?

Currently, this tool is not available in demo trading; a real account is required to use it.

What is the likelihood of liquidation in arbitrage?

The risk of liquidation mainly arises from partial order fills. For example, if one side is filled at 70%, and the other only at 50%, position imbalance occurs. Enabling smart rebalancing significantly reduces this risk, as the system regularly checks execution and automatically balances positions with market orders.

What margin mode is required for arbitrage?

Arbitrage operates exclusively in cross-margin mode on the Single Trading Account. Other margin modes are not supported.

Why is an order not executing?

The most common reason is insufficient free margin on the STA to simultaneously execute the required order sizes in both directions. Check your margin level and either increase it or reduce the order size.

What happens if rebalancing is disabled?

If disabled, the system will not automatically correct execution imbalances. It is assumed that the trader specified the desired directions and sizes, and orders will operate independently until fully executed or canceled.

Why has rebalancing stopped despite some unfilled orders?

Smart rebalancing operates only within 24 hours of order placement. After this period, any unfilled orders are automatically canceled, and the strategy stops.

Where to view positions and assets after full execution?

Once all orders are fully executed, the strategy concludes. To review results:

• Spot order history: “Spot → History”
• Contract order history: “Perpetual Contracts/Futures → History”
• Current contract positions: “Positions” on the derivatives trading page
• Spot assets and funding income: “Spot → Assets” and your STA transaction log

Why do imbalances remain during active rebalancing?

This can occur due to two main reasons: insufficient collateral or market liquidity issues preventing timely execution of market orders for rebalancing.

How does order cancellation affect arbitrage deals?

The impact depends on the rebalancing state:

• If rebalancing is active and you cancel an order in one direction, the system will automatically cancel the unfilled order in the opposite direction and stop the entire strategy.
• If rebalancing is disabled, orders in both directions operate independently, and canceling one does not affect the other until they are either filled or canceled.

Arbitrage trading is a powerful strategy for traders seeking to profit from market inefficiencies without taking directional risk. With automated tools and flexible margin parameters, market participants can turn price discrepancies and funding rate differences into measurable profits.