Complete Guide to Cryptocurrency Arbitrage: How to Earn Stable Income from Price Differences on Bybit

In the cryptocurrency market, trading strategies that leverage price differences of assets across multiple markets are gaining attention. This is called cryptocurrency arbitrage, an investment strategy that profits from price discrepancies of the same asset on different exchanges. Especially on major platforms like Bybit, dedicated tools supporting crypto arbitrage are provided, enabling traders to efficiently capitalize on price differences and generate revenue.

What Is Cryptocurrency Arbitrage: Understanding the Basic Strategies

The arbitrage strategies commonly used in the crypto market are broadly classified into three categories.

Spot-Futures Arbitrage involves profiting from price differences of the same asset between the spot and futures markets. Since futures tend to be priced higher, traders buy the spot asset and sell the futures contract, aiming to profit from the convergence of prices at expiration.

Funding Rate Arbitrage utilizes the funding mechanism of perpetual contracts and is considered a particularly stable source of income within crypto arbitrage.

Futures Arbitrage exploits price differences between futures contracts with different expiration dates, representing a more advanced approach.

The Two Main Mechanisms of Bybit Arbitrage: Funding Rate and Spread

Funding Rate Arbitrage: Earning Interest on Perpetual Contracts

The simplest mechanism offered by Bybit’s arbitrage platform is funding rate arbitrage. In this method, traders simultaneously place opposite positions—buying the spot and shorting the perpetual contract with the same amount—to offset price fluctuation risks while continuously earning funding fees.

When the funding rate is positive (positive arbitrage), traders buy the spot and short the perpetual, earning funding fees from the long position holder. For example, if the funding rate for BTCUSDT perpetual is +0.01%, short position holders receive funding from long position holders. This setup allows traders to offset potential losses in one market with gains in another while earning funding fees.

Conversely, if the funding rate is negative (negative arbitrage), the structure reverses. Traders short the spot and go long on the perpetual to secure stable profits.

Spread Arbitrage: Locking in Price Differences Between Markets

Another key arbitrage mechanism is spread arbitrage, which involves simultaneously buying and selling the same asset across different markets to profit from the price difference.

For example, if the trading price of BTC in the spot market is below the USDC futures contract price, traders can buy BTC in the spot market and sell BTC in the futures market, capturing the price gap. This strategy aims to profit from the convergence of futures and spot prices at contract expiration. It minimizes short-term price fluctuations while locking in a reliable price difference.

Crypto Arbitrage Features on the Bybit Platform

Bybit’s arbitrage tool integrates essential functions for executing crypto arbitrage. Currently, this tool is available only via the Bybit app and is limited to users with an integrated trading account (UTA) using cross-margin mode.

Supported Trading Pairs:

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

Automatic Detection of Arbitrage Opportunities

Bybit’s arbitrage platform automatically ranks trading pairs based on funding rates or spreads, visually highlighting the best opportunities.

Funding Rate Ranking displays each currency pair’s funding rate in descending order, allowing traders to quickly identify the most profitable opportunities. Spread Ranking clearly shows the price differences across markets, enabling immediate identification of pairs with the largest spreads.

Smart Rebalancing: Automatic Portfolio Adjustment

One of Bybit’s innovative features is smart rebalancing. Enabled by default, this function monitors executed orders every two seconds and automatically adjusts the portfolio to maintain balance.

For example, if a trader places a limit buy order for spot and a limit sell order for perpetual simultaneously, the system periodically checks the execution quantities of both legs. If only one leg is partially filled, it automatically uses market orders to balance the positions. This rebalancing process remains active for 24 hours, after which any unfilled orders are automatically canceled.

Support for Over 80 Collateral Assets

With an integrated trading account, traders can use over 80 different crypto assets as collateral for arbitrage trading. This allows traders holding spot assets to leverage them directly as margin, reducing the need for additional capital.

For instance, if the last traded price (LTP) of BTC is 30,000 USDT, and the trader has 30,000 USDT in their integrated account, they can use 1 BTC spot as margin to short perpetual and simultaneously place a buy order for spot.

Practical Guide: How to Execute Arbitrage Orders on Bybit

Steps to Perform Arbitrage on the Bybit App

Step 1: Access the Arbitrage Tool

From the Bybit app’s trading page, tap “Tools” and select “Arbitrage.” All available arbitrage opportunities are listed on this page.

Step 2: Select Trading Pairs and Strategy

Choose the assets based on funding rate or spread rankings. Using these rankings helps identify the most profitable opportunities, as the selection significantly impacts potential returns.

Step 3: Set Order Parameters

Next, select the order type. For each currency pair, choose either long or short; the system will automatically determine the opposite leg’s direction. You can choose market or limit orders—if limit, input the desired price. After entering, the current funding rate or spread rate is displayed next to the pair, allowing you to estimate arbitrage costs.

Specify the order quantity, representing the amount needed to fill one leg. The system will automatically fill the other leg. Enabling smart rebalancing (enabled by default) reduces the risk of one leg remaining unfilled for a long time.

Step 4: Confirm the Order

Tap “Trade Both Legs” to place the orders.

Step 5: Track and Manage Orders

Check ongoing arbitrage orders via “Tools” → “Active.” Once fully filled, go to “Tools” → “History” to review order history.

Step 6: Monitor Positions and Assets

After placing orders, actively manage your positions and assets. View derivative positions in the “Positions” section of the perpetual and futures pages, and check your spot assets in the “Assets” section. Funding fee details are available in the “Trade History” within your integrated account’s asset page.

Risk Management and Precautions: Ensuring Safe Arbitrage Trading

Potential Risks

Crypto arbitrage is not risk-free. Understanding and managing various risks is crucial.

Partial Fill Risk: If both legs are filled at different times, position exposure may become unbalanced, risking forced liquidation. Enabling smart rebalancing is strongly recommended.

Slippage Risk: When using market orders in smart rebalancing, prices may deviate from initial settings, especially in low liquidity conditions.

Position Management Responsibility: The arbitrage tool does not fully automate position management or closing. Traders must actively monitor and manage their positions.

Insufficient Margin: If the available margin in the integrated account is inadequate for both legs’ orders, the orders will not execute. Always ensure sufficient margin.

When to Use Crypto Arbitrage

During Spread Expansion: When clear spreads exist between two pairs, arbitrage can lock in short-term spreads and minimize slippage caused by market fluctuations.

For Large Orders: When executing large trades or responding to rapid market changes, trading both legs simultaneously helps manage costs efficiently.

During Multi-Position Closures: When executing multiple legs or closing multiple positions, arbitrage ensures precise execution of both sides.

Frequently Asked Questions (FAQs): Clarifying Crypto Arbitrage

Q: How are the spread, spread rate, and funding rate APR calculated?

Use these formulas:

• Spread = LTP of sell symbol – LTP of buy symbol
• Spread Rate = (LTP of sell symbol – LTP of buy symbol) ÷ LTP of sell symbol
• Funding Rate APR = abs(cumulative funding rate over 3 days) ÷ 3 × 365 ÷ 2
• Spread APR = abs(current spread rate) ÷ maximum period × 365 ÷ 2

Q: Can arbitrage be used to close existing positions?

Yes. The arbitrage tool can be used not only to open new positions but also to close existing ones.

Q: Is arbitrage supported for sub-accounts?

Yes, but only if the sub-account is part of an integrated trading account (UTA).

Q: Can I use the arbitrage tool in demo trading?

Currently, the arbitrage tool is not available in demo mode.

Q: Why did my arbitrage not complete?

The most common reason is insufficient margin in the integrated account for both legs. Adjust order sizes or add margin accordingly.

Q: What happens if I disable smart rebalancing?

Disabling smart rebalancing stops automatic adjustment of order quantities. You must place both legs’ orders simultaneously and ensure they are fully filled; otherwise, the strategy halts.

Q: Why does smart rebalancing stop after 24 hours?

If either leg’s order remains unfilled after 24 hours, the rebalancing process automatically stops, and unfilled orders are canceled to prevent indefinite waiting.

Q: Does canceling an order on the spot or derivatives page affect arbitrage orders?

If smart rebalancing is enabled, canceling one leg’s order will automatically cancel the other unfilled leg, stopping the arbitrage. If disabled, the legs are independent, and canceling one does not affect the other.

Crypto arbitrage, when executed with proper understanding and risk management, can be an effective strategy to generate stable profits from market price differences. Leveraging Bybit’s arbitrage tools can help implement this strategy more efficiently.