Cryptocurrency Arbitrage: How Trading Works on Price Discrepancies

What is cryptocurrency arbitrage? It is an investment strategy that allows traders and investors to profit from price discrepancies of the same asset across different trading platforms or market segments. In the cryptocurrency market, this approach has become especially relevant due to high volatility and constant fluctuations in liquidity between exchanges.

The fundamental principle of cryptocurrency arbitrage involves simultaneously opening opposite positions on two different markets. This way, the investor neutralizes price risk and generates income solely from the difference in quotes, rather than predicting market direction.

The Three Main Types of Arbitrage in the Cryptocurrency Market

Modern cryptocurrency markets offer several methods for implementing arbitrage strategies. The first and most common is spot arbitrage, where the trader simultaneously buys an asset on one platform (usually where the price is lower) and sells it on another (where the price is higher). The advantage of this approach is its simplicity and relative safety, as the investor owns the actual asset.

The second type is arbitrage on funding rates. Many platforms offer trading of perpetual contracts, where long positions pay fees to short positions or vice versa, depending on market structure. When these fees are significant, the investor can buy the asset on the spot market and open an opposite position in a perpetual contract, earning from the difference in funding rates instead of worrying about price movement.

The third approach is arbitrage between futures contracts and the spot market. Futures with a fixed expiration date are often traded at a premium or discount to the spot price. Experienced traders can open a long position on the spot market and a short position in futures (or vice versa), profiting from the convergence of prices at contract expiration.

How the Price Spread Works in Arbitrage Practice

Let’s take a specific example. Suppose Bitcoin is quoted at 30,000 USDT on one platform and 30,050 USDT on another. This 50-point difference is the spread. The investor can buy 1 BTC for 30,000 USDT on the first platform and simultaneously sell it for 30,050 USDT on the second, earning 50 USDT with no risk.

In practice, such simple opportunities are rare because experienced market makers quickly eliminate them. However, more complex strategies combining spot markets and derivatives remain accessible. For example, if the funding rate on a perpetual contract is positive (+0.01% per hour), it means long positions pay fees to short positions. In this case, the trader can buy the asset on the spot market and open a short in derivatives, earning regular income from funding fees even if the price remains stable.

Tools and Automation in Arbitrage

Modern trading platforms offer specialized tools to simplify arbitrage trading. One key tool is an automatic portfolio rebalancing system that periodically checks whether orders in both directions are executed evenly. For example, if 0.8 BTC out of a planned 1 BTC on the spot market is filled, and only 0.6 BTC in the perpetual contract, the system automatically places a market order for 0.2 BTC in the direction of the shortfall to restore balance.

This feature significantly reduces the risk of portfolio imbalance and incomplete hedging when one part of the strategy is executed and the other is not. The system typically checks the balance every 2 seconds and operates 24/7, with unfilled orders automatically canceled afterward.

Additionally, modern platforms support over 80 different assets as collateral for opening positions. This means that an investor holding a portfolio of crypto assets can use these assets as collateral to open arbitrage positions without transferring funds between wallets.

Profitability Calculation and Key Metrics

To assess the feasibility of an arbitrage trade, investors use several key indicators.

Spread is calculated as the difference between the selling price and the buying price:

• Spread = Selling Price − Buying Price

Relative spread (spread percentage):

• Spread Percentage = (Selling Price − Buying Price) / Selling Price × 100%

For arbitrage based on funding rates, the annual percentage rate (APR) is used:

• APR of funding = (Total fee paid over the last 3 days / 3) × (365 / 2)

This formula indicates the expected annual return if current funding rates remain unchanged.

Similarly, APR for price spreads is calculated as:

• APR of spread = (Current spread / Max period until expiration) × 365 / 2

Here, the maximum period is the number of days until the futures contract expires.

Risks and Position Management Requirements

Despite the attractive guaranteed income, cryptocurrency arbitrage carries certain risks. The main risk is liquidation due to incomplete order execution. For example, if the spot order is fully filled but the derivative order is only partially filled, the investor remains with an open position in one direction, creating margin call risk.

Another risk is slippage, which can occur during automatic rebalancing. When the system places a market order to restore balance, execution may occur at a price different from the market at the moment the signal triggers.

A third risk is insufficient margin support. If the value of the assets used as collateral drops below a certain threshold, the platform may close positions at a loss.

To minimize risks, investors are recommended to:

• Enable automatic rebalancing features
• Regularly check portfolio balance and open positions
• Actively manage positions rather than relying solely on automation
• Maintain sufficient margin with a comfortable safety cushion

When to Use Cryptocurrency Arbitrage

Arbitrage trades are advisable in scenarios where a stable and significant spread exists between two trading pairs or instruments, allowing locking in short-term profit and avoiding the risk of unfavorable price movements.

When executing large buy or sell orders, two-step arbitrage helps minimize slippage. The investor can buy on one market and sell on another simultaneously, obtaining a more favorable average price than sequential execution.

When closing multiple positions or implementing complex trading strategies, arbitrage ensures precise and synchronized execution, preventing missed opportunities or incomplete position closures.

Frequently Asked Questions About Cryptocurrency Arbitrage

Can arbitrage be used to close existing positions?
Yes, many arbitrage tools allow both opening and closing positions simultaneously on both markets.

Is a special API required to enter a position?
No. Modern trading tools provide user-friendly interfaces for placing arbitrage orders without programming or API integration.

Is arbitrage available on sub-accounts?
Yes, provided the sub-account is configured as a unified trading account with margin trading support.

What margin mode is used for arbitrage?
Arbitrage operates in cross-margin mode, where margin is shared across all open positions, ensuring more efficient capital use.

Why did the order not execute?
The most common reason is insufficient available margin to open opposite positions simultaneously. Try reducing the order size.

What happens after 24 hours of rebalancing?
The system automatically stops the rebalancing function and cancels all remaining unfilled orders. This prevents uncontrolled accumulation of partial positions.

Where can I check the history of executed orders and profits?
The history of spot and futures orders can be viewed in the specific market’s order history section. Profits from funding fees are displayed in the account’s transaction log.

Cryptocurrency arbitrage remains one of the most attractive strategies for conservative investors seeking a way to generate income without taking directional price risk. Proper use of this tool, careful risk management, and understanding market mechanics enable participants to achieve consistent profits in various market conditions.