Arbitrage in Crypto Trading: The Complete Guide to Profiting from Price Discrepancies

Arbitrage is one of the most promising strategies in modern cryptocurrency trading. The essence of this method is to profit from price discrepancies between different trading platforms or between spot and futures markets. Trading using arbitrage opportunities allows minimizing the impact of volatility and generating relatively stable income if the right entry point is chosen.

Three Key Types of Arbitrage Trading

The cryptocurrency market offers traders several main directions for applying arbitrage. Each has its characteristics, risks, and profit potential.

Arbitrage in the Spot Market and Futures

This type of arbitrage is based on simultaneous trading of the same asset in two different market segments. The strategy is straightforward: buy the asset where its price is lower and simultaneously sell where the price is higher. For example, if Bitcoin is cheaper on the spot market than in the BTCUSDT futures contract, a trader can buy BTC at spot and sell a futures contract. When the futures contract expires, its price converges with the spot price, and the trader locks in profit from the difference.

Funding Rate Arbitrage

This trading method is actively used in perpetual contracts markets. The mechanism works as follows: on most platforms, traders with long positions in perpetual contracts periodically pay a fee (the funding rate) to those holding short positions. If this rate is positive, an arbitrageur can simultaneously buy the asset on the spot market and open a short position in the perpetual contract for the same amount. This way, the trader receives two streams of income: potential price convergence (which minimizes losses) and regular funding payments.

For example, suppose the perpetual contract BTCUSDT has a positive funding rate of +0.01% per hour. The trader buys 1 BTC on the spot market and opens a short position for 1 BTC in the perpetual contract. Thanks to hedging, price fluctuations of BTC do not affect the outcome, but the trader regularly receives funding fees from the long position.

Price Spread Arbitrage Between Contracts

This arbitrage type focuses on discrepancies between the spot market and futures contracts. When the spread between the spot price and the futures price is significant, the arbitrageur locks in this difference by simultaneously buying on the spot and selling the futures (or vice versa). When the futures contract expires, prices converge, allowing the trader to profit from the initial spread.

Arbitrage Trading Infrastructure: Tools and Opportunities

Modern cryptocurrency trading platforms provide specialized tools for arbitrage trading. These tools greatly facilitate the process of finding opportunities and managing positions.

Finding and Ranking Opportunities

The first step in arbitrage trading is to identify genuinely profitable opportunities. Professional platforms offer automatic ranking functions for trading pairs based on spread size or funding rates. This allows traders to quickly identify the most interesting pairs and assess the potential profitability even before opening a trade.

Ranking can be organized in two ways:

• By funding rates (from high to low), helping select pairs with maximum fee income
• By spread size (from large to small), indicating the most advantageous windows for futures operations

Simultaneous Order Placement on Two Markets

A key feature of arbitrage trading is the ability to place orders simultaneously and independently on two different markets from a single screen. The trader sees quotes and liquidity levels for both pairs at once, enabling rapid decision-making. The traded asset amount should always be the same on both markets but in opposite directions (buy on one side, sell on the other).

Automatic Portfolio Rebalancing (Smart Rebalancing)

One of the main challenges in arbitrage is that orders on two markets may execute unevenly. If 70% of an order is filled on one market and only 40% on the other, this creates imbalance and increases liquidation risk. Modern platforms solve this problem with an automatic smart rebalancing feature, which works as follows:

The system checks every 2-3 seconds how much of each order has been executed. If an imbalance is detected, market orders are automatically placed to compensate. For example, if 0.6 BTC is bought on the spot market and only 0.4 BTC is sold in the perpetual contract, the system will automatically sell another 0.2 BTC in the perpetual. The process continues until all orders are fully executed or for a set period (usually 24 hours).

Advanced Margin Trading Capabilities

Unified trading accounts allow using over 80 assets as collateral. This means traders are not limited to holding funds solely in USDT or USDC. Any asset in the portfolio can serve as collateral, making capital more flexible and enabling better management of positions across multiple assets simultaneously.

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

To begin applying arbitrage strategies practically, you need to understand the order placement and position management process clearly.

Step 1: Choose the Right Pair

Go to the specialized trading tools section and open the list of available trading pairs. Analyze funding rates or spreads depending on your chosen strategy. Select the pair that looks most attractive in terms of potential profitability.

Step 2: Decide on Direction and Position Size

Determine the direction of the first order (long or short on one of the markets). Once you select the direction for one market, the system will automatically prepare the opposite direction for the other market. Enter the desired position size. Usually, entering the size for one side is enough—the system will fill in the size for the other.

Step 3: Select Order Type

You can use either market orders (immediate execution at current price) or limit orders (execution when the specified price is reached). Market orders ensure instant fill but may lead to slippage. Limit orders give more control but may not execute if the price does not reach the set level.

Step 4: Enable Smart Rebalancing

It is recommended to activate the automatic portfolio rebalancing feature. This significantly reduces the risk of one order executing before the other, creating dangerous imbalance. The feature is enabled by default and operates for 24 hours after opening the position.

Step 5: Confirm and Monitor

Click the confirm button, and both orders (in opposite directions) will be sent to the market simultaneously. You can then track the order statuses in the active positions section. As orders are filled, the system will automatically manage rebalancing.

Step 6: Manage Results

After full execution, positions will be visible in the respective platform sections. Spot assets are shown in the spot trading section under “Assets,” while perpetual contracts and futures are displayed in the derivatives section. If you used a funding strategy, the earned fees can be tracked in the transaction history.

Practical Calculations: Profitability Assessment

Accurate calculation of potential profit is fundamental to successful arbitrage trading. Here are the main formulas you need to know.

Calculating the Spread Between Two Prices

Spread = Selling Price − Purchase Price

This simple formula shows the absolute difference between two prices. For example, if you buy BTC on the spot for $43,000 and sell a futures contract for $43,200, the spread is $200.

Calculating Relative Spread (Percentage)

Relative Spread (%) = (Selling Price − Purchase Price) / Selling Price × 100%

This indicates the deal’s efficiency as a percentage. A $200 spread on a $43,200 price is approximately 0.46%, which is a good result.

Calculating Annualized Return (APR) from Funding Rates

APR from funding rate = (Total rate over 3 days / 3) × 365 / 2

This formula helps annualize the current rate for better understanding of income scale. If the current rate is 0.01% per hour, it could amount to about 87% annually, which seems very attractive but requires active management.

Calculating APR for Futures Spreads

APR of spread = (Current spread / Maximum period in days) × 365 / 2

Here, the maximum period is the number of days until the contract’s expiration. This formula shows the annual return if the spread remains until the contract’s close.

Risks and Challenges of Arbitrage Trading

Despite its apparent attractiveness, arbitrage involves serious risks that must be understood and properly managed.

Liquidation Risk Due to Uneven Execution

If orders are executed unevenly (e.g., 80% on one market and 20% on the other), the margin on one side may become critically low. This can lead to forced liquidation at unfavorable prices, resulting in losses. That’s why activating smart rebalancing is crucial.

Slippage and Price Deviations

When the system places market orders for rebalancing, the price may deviate from expectations. This is especially relevant in low-liquidity pairs or during volatile market conditions. Each percentage of slippage reduces expected profit.

Insufficient Market Liquidity

Some trading pairs have low trading volume, meaning your large order may not be fully filled. This creates imbalance, which is difficult to compensate for with market orders.

Time Factor and Smart Rebalancing Duration

Smart rebalancing operates for 24 hours. If within this period one of the orders remains unfilled, the system will stop the process and cancel remaining orders. This can lead to the complete loss of the planned trade.

Fees and Charges

Arbitrage requires active trading, which incurs commissions. Each order (opening and closing) attracts a fee percentage. On high-yield trades, this may be minimal, but on margin operations, fees can completely eat into potential profits.

Frequently Asked Questions About Arbitrage Strategies

When is the most appropriate time to open arbitrage positions?

Arbitrage is most effective when:

• The spread between two markets exceeds 0.5–1% — enough to cover fees and generate profit
• During high volatility, when market conditions change rapidly, creating short-term price discrepancies
• When funding rates are abnormally high (over 0.05% per hour) — a signal to use the funding strategy
• When you need to execute a large order quickly — arbitrage helps minimize market impact

What spread size is considered profitable?

The minimally profitable spread depends on your fee structure. If you pay 0.1% per trade, total fees are 0.2%. Add slippage (0.1–0.3%), so the minimum spread should be at least 0.5–0.7% to guarantee profit.

Can arbitrage be used to close or transfer positions?

Yes, absolutely. Arbitrage can be used both for opening new positions and closing existing ones. This is especially useful when you want to quickly switch from one asset to another without significantly impacting the price.

Does arbitrage work on sub-accounts?

It depends on the account type. On standard sub-accounts, arbitrage is unavailable, but on Unified Trading Accounts (ETA), the feature is fully supported.

What happens if I disable smart rebalancing?

Disabling automatic rebalancing means each order is considered independently. If one order executes and the other does not, imbalance is not automatically compensated. You will need to manually manage positions, which greatly increases liquidation risk.

Why did my arbitrage order not execute?

Main reasons include:

• Insufficient margin in your account to execute both orders simultaneously
• Lack of liquidity in one or both trading pairs
• The limit order price was never reached

Try reducing order size or choosing a more liquid pair.

How long does smart rebalancing last?

The system automatically activates rebalancing for 24 hours after opening the position. After this period, any remaining unfilled orders are canceled, and the process stops. This prevents positions from “hanging” indefinitely.

What margin mode is used in arbitrage?

Arbitrage operates exclusively in cross-margin mode. In this mode, all account margin functions as a single pool, reducing the risk of liquidation of individual positions.

Why did smart rebalancing stop even though orders are not fully filled?

This occurs after the 24-hour period. The system automatically stops and cancels unfilled orders to prevent prolonged “hanging” in the battle between spot and futures.

Where can I see positions and assets after order execution?

After full execution:

• Spot assets are visible in the “Assets” section of spot trading
• Positions in perpetual contracts and futures are shown in the “Positions” section under derivatives
• Funding fees can be tracked in the transaction history of the main account

Successful arbitrage application in crypto trading requires continuous learning, careful market analysis, and strict risk management. Remember, while this strategy minimizes volatility impact, it does not guarantee profits and requires active trader involvement.