Arbitrage is a universal strategy for extracting profit from market discrepancies.

Arbitrage is a method of earning profits based on exploiting price differences of the same asset across different markets or trading pairs. The arbitrage strategy has been used in cryptocurrency trading for many years and remains one of the most reliable techniques for risk management while generating income.

Main Directions of Arbitrage Strategies in Cryptocurrency Markets

The development of the cryptocurrency market has led to the emergence of several types of arbitrage. Each strategy operates on its own principle, but they all share a common goal – to lock in profits from price anomalies.

Spot Market Arbitrage involves simultaneously buying an asset on one platform and selling it on another where the price is higher. This is a classic and most straightforward type of strategy, though it requires quick execution.

Funding Arbitrage is a more complex mechanism related to perpetual contracts. Traders open opposite positions on spot and futures markets, earning profit from funding fees.

Futures Contract Arbitrage exploits the difference between the futures contract price and the underlying asset, expecting convergence at contract expiration.

How Arbitrage Works in Practice: Funding and Price Spreads

To understand how arbitrage functions in reality, it’s essential to grasp two key mechanisms.

Positive and Negative Funding Arbitrage

When the funding rate for a perpetual contract is positive (e.g., +0.01%), it means long position holders pay a fee to short position holders. Traders can take advantage of this: simultaneously buy the asset on the spot market and open a short position on the corresponding contract. This hedging allows earning from the funding fee while neutralizing price risk.

The opposite scenario occurs when the funding rate is negative. In this case, it’s more profitable to open a long position on the contract and take a short position on the spot market.

Extracting Profit from Price Spreads

The second approach involves monitoring the difference between the asset’s spot price and its futures price. If the futures are trading higher than the spot, the trader buys on the spot market and sells the futures contract. As the expiration date approaches, prices converge, and the position is closed with a profit from the spread.

What Constitutes Arbitrage Infrastructure: Tools and Capabilities

Modern cryptocurrency platforms provide specialized tools for arbitrage. These tools greatly simplify the process of placing orders simultaneously across multiple markets without using APIs.

Opportunity Scanning. Traders gain access to ratings of funding rates and spreads, enabling quick identification of the most profitable trading pairs at any given moment.

Simultaneous Order Placement. On a single screen, price movements for two trading pairs—spot and derivative—are displayed. Traders can place opposite orders with one click, avoiding delays and slippage.

Automatic Rebalancing Mechanism. The system periodically checks whether the same number of contracts has been executed in both directions. If an imbalance occurs (e.g., 0.5 BTC executed on the spot market but only 0.4 BTC on the contract), the system automatically places a market order to balance the positions. This reduces the risk of one side of the strategy remaining open.

Support for Multiple Assets. Modern systems with a single trading account allow the use of over 80 different assets as collateral, significantly increasing flexibility in portfolio management.

Step-by-Step Execution of Arbitrage Trading

The process of placing an arbitrage order requires following a specific sequence of steps.

First Step: Asset Selection. The trader reviews available trading pairs, focusing either on funding rates or on spread sizes depending on the chosen strategy.

Second Step: Direction Determination. Decide whether to open a long position on one market and a short on another (or vice versa). The number of orders in both steps should be the same.

Third Step: Order Type Selection. Decide whether to use a market order (immediate execution) or a limit order (setting a specific price).

Fourth Step: Volume Setting. Enter the position size in one direction; the system will automatically set the same volume for the opposite side.

Fifth Step: Enable Protection. It’s recommended to activate the automatic rebalancing feature, which prevents significant imbalance between the two sides of the trade.

Sixth Step: Monitoring. After executing the orders, monitor positions on both the spot market and derivatives contracts. Funding fee information can be checked in the transaction log.

Risks and Protective Mechanisms in Arbitrage

Despite its reputation as a low-risk strategy, arbitrage does not guarantee profits and requires understanding potential risks.

Partial Execution Risk. If an order in one direction is partially or fully filled, but the opposite order is not, the position remains exposed to market risk. Automatic rebalancing is designed to prevent this.

Slippage Risk During Rebalancing. When the system places a market order to balance positions, the price may move away from the initial level, reducing profit.

Liquidation Risk. In case of significant price movement and insufficient collateral, the trader may face automatic position liquidation.

Liquidity Constraints. Some markets may lack sufficient liquidity for immediate execution of large orders, leading to delays and additional costs.

Practical Questions About Arbitrage

When does arbitrage make sense? The strategy is especially useful when there is a clear spread between trading pairs, when working with large volumes where normal execution would cause significant slippage, or when opening and closing multiple positions simultaneously that require synchronization.

How to calculate potential profit? For spreads, use the formula: Spread = selling price – purchase price. To estimate annualized return: APR = (average funding fee over the period / number of days) × 365. These calculations help determine whether opening a position is worthwhile.

Can arbitrage be used to close positions? Yes, the strategy works both for opening new positions and for managing and closing existing ones.

What happens if automatic rebalancing is disabled? The system stops monitoring the balance of orders in both steps. Orders will operate independently, increasing the risk that one side remains open if the other is not filled or only partially filled.

How long does rebalancing last? The system checks the balance within 24 hours of activation. If orders are not fully executed within this period, the system stops and cancels remaining orders.

What happens if one order is manually canceled? If automatic rebalancing is enabled, canceling an order in one direction will automatically cancel the order in the opposite direction and end the strategy. With rebalancing disabled, orders operate independently.

Arbitrage is a reliable tool for traders seeking to profit from market inefficiencies while minimizing price risk. Successful application requires understanding the mechanics of the strategy, careful monitoring of positions, and adherence to risk management rules.