Arbitrage is not just trading: a complete breakdown of how to profit from price discrepancies

Arbitrage is a strategy that captures short-term opportunities arising from price differences of the same asset across different markets or trading pairs. It sounds simple, but the mechanics go deeper — it exploits market inefficiencies and requires precise execution. In the cryptocurrency market, arbitrage has become one of the most in-demand methods for traders who prefer to minimize speculative risk and work with fixed or near-fixed spreads.

What’s Behind the Concept of Arbitrage: From Theory to Practice

When people talk about arbitrage, they often mean a straightforward idea — buy cheaper where the price is lower and sell higher where the price is higher. But in the world of cryptocurrencies, arbitrage is a multi-layered structure. In practice, several main forms are distinguished.

The first type is classic spot arbitrage, where a trader simultaneously buys an asset on one market and sells it on another. For example, if BTC is cheaper on one exchange, you can instantly buy and list it for sale at a markup on another platform. The second type involves arbitrage between spot and derivatives markets, where traders exploit the difference between the immediate delivery price and the futures or perpetual contract price. The third involves using funding rates, where income comes not from price differences but from periodic payments between traders with opposite positions.

Each of these methods requires speed, precision, and a full understanding of where to look. The main advantage is that arbitrage is a trading method with a more predictable outcome compared to speculating on price direction.

The Two Pillars of Arbitrage: Funding Rates and Spreads Between Contracts

Digging into details, the entire arbitrage strategy revolves around two main mechanisms.

Funding Rate Arbitrage — when money flows from one pocket to another. This method works thanks to systematic payments between long and short positions in perpetual contracts. When demand for longs exceeds demand for shorts, long positions pay a fee to shorts. Conversely, shorts pay longs when demand shifts. A trader can take both sides simultaneously — buy the asset on the spot market and open a short position on the same amount in a perpetual contract. If the funding rate is positive (longs pay), the trader earns income from these payments, hedging the asset’s price.

For example, suppose the BTCUSDT perpetual contract has a funding rate of +0.01% per funding period. The trader with a short position receives this fee. Therefore, it makes sense to buy 1 BTC on the spot (for 30,000 USDT) and simultaneously open a short on 1 BTC via the contract. The BTC price can fluctuate wildly, but the trader remains protected. Plus, they earn from periodic funding payments. This is called positive arbitrage.

The opposite scenario — negative arbitrage — occurs when the funding rate is negative, and shorts pay longs. Then, the logic reverses: sell on the spot, open a long on the contract, and profit from the same mechanism but in reverse.

Spread Arbitrage — catching discrepancies between prices across different maturities. Here, the focus is on the price difference between the spot market (where the asset is available immediately) and futures or perpetual contracts (with deferred delivery). If the futures contract on BTC trades above the current spot price, a spread exists. The trader can buy BTC cheaper on the spot and sell the contract at a higher price, pocketing the difference as profit. As the contract approaches expiration, the two prices converge, and the spread narrows. This compression of the spread is the profit.

Both strategies — funding and spreads — require synchronized execution of orders in opposite directions. If one order executes and the other gets stuck, it turns into regular speculation with liquidation risk instead of arbitrage.

How Platforms Implement Arbitrage: Smart Rebalancing and Single Margin

In practice, trading on two fronts simultaneously isn’t simple. It requires infrastructure that can monitor two trading pairs, synchronize orders, and guarantee execution on both sides. One such system is arbitrage via a platform supporting a Single Trading Account (STA).

This system works as follows: the trader places a limit buy order for 1 BTC on the spot market and simultaneously a limit sell order for 1 BTC in the perpetual contract. After placing, the system runs in the background, checking every 2 seconds how much has been executed in each direction. If, for example, 0.5 BTC is filled on the spot but only 0.4 BTC on the contract, the system automatically places a market order for the remaining 0.1 BTC in the needed direction. This is called smart rebalancing and is enabled by default.

The rebalancing mechanism operates over 24 hours. If within this period the order isn’t fully executed, the system cancels the remaining parts and stops. This acts as a safeguard against hanging orders.

Simultaneously, the system supports over 80 assets as collateral via the STA. This means you can open arbitrage positions using any of these assets, not just USDT or USDC. For example, if you have 1 BTC and 30,000 USDT as collateral, you can buy 1 BTC on the spot and open a short on 1 BTC via the contract, using both assets as margin. This greatly expands possibilities and reduces the need for cash.

From Concept to Execution: Step-by-Step Guide to Placing Arbitrage Orders

The process in practice becomes clearer when broken down into steps.

Step 1. Open the trading section, find the arbitrage tools. The interface will display all available trading pairs ranked by funding rates or spreads.

Step 2. Choose an asset. The system shows a list sorted by attractiveness. For example, if the funding rate on BTCUSDT is high, this pair will be at the top. Also, check the current spread — if it’s significant, it’s a good candidate for spread arbitrage.

Step 3. Decide on your position. Choose whether to open a long or short on the selected pair. The system automatically mirrors the position — if you select a long on one side, the opposite side gets a short. The amount for both directions must always be equal.

Step 4. Select order type — market or limit. The current funding rate or spread will be displayed nearby so you can assess potential profit. Enter the size, and the system will automatically fill in the size for the opposite side.

Step 5. Enable smart rebalancing (already enabled by default). This is critical if you want to avoid imbalance due to asynchronous execution.

Step 6. Confirm. The system will place orders on both sides simultaneously. Now, smart rebalancing begins — it will check execution every 2 seconds and adjust the market orders accordingly.

Step 7. Monitor your position in the “Active” section. After execution, all details will be in the order history. Derivative positions are visible in the contracts tab, spot assets in the assets section. Funding income can be viewed in the transaction log.

The entire process is simpler than it might seem at first glance. The key is to follow the logic of opposite orders and not forget about rebalancing.

When to Use Arbitrage and When to Avoid It: Risks and Realities

Many traders see arbitrage as a cure-all for volatility. In reality, like any tool, it has clear boundaries of applicability and serious limitations.

When arbitrage works well:

First — when the spread between two trading pairs widens noticeably. This often happens during volatile market movements when one exchange or contract lags behind another. Traders can lock in this spread and avoid slippage during regular buy-sell attempts.

Second — when working with large volumes. Big orders can significantly move the market in traditional trading. Using synchronized orders on two fronts can reduce impact and execute positions more efficiently.

Third — when the funding rate is significantly positive or negative. Then, income from funding can be attractive, and price risk is hedged.

Where arbitrage falls short:

First — incomplete execution. If an order in one direction executes but the other gets stuck, instead of a protected position, you get open risk. Smart rebalancing helps but doesn’t guarantee full protection, especially if margins are insufficient.

Second — liquidation during imbalance. If orders execute asynchronously and the supporting margin isn’t enough to cover temporary imbalance during high volatility, liquidation can occur.

Third — slippage during rebalancing. When the system automatically places market orders to align positions, prices can move away from initial expectations, reducing profit.

Fourth — insufficient margin. Available margin must be enough to execute orders in both directions. If margins are low, the system will refuse to place orders.

Practical advice: arbitrage is not for beginners. You need to understand funding mechanics, evaluate spreads accurately, and be ready to actively manage positions. The system can automate rebalancing but cannot automatically close positions if something goes wrong. Responsibility lies with the trader.

Common Questions and Unexpected Situations

Why didn’t the order execute?
If available margin isn’t enough to execute orders on both sides simultaneously, the system will refuse. Reduce the size and try again.

What if I disable smart rebalancing?
Without rebalancing, the system won’t automatically correct imbalances. Orders on both sides work independently, and one may execute while the other remains pending.

How long does smart rebalancing last?
Exactly 24 hours. If within this period the order isn’t fully executed, the remaining parts are automatically canceled.

What happens if I cancel an order on one side?
If smart rebalancing is enabled, canceling one order cancels both, stopping the strategy. If rebalancing is disabled, orders are independent, and the strategy can continue without protection.

Can I use arbitrage to close positions?
Yes, completely. If you have an open position on an asset, arbitrage can be used to exit it.

Is arbitrage available in demo mode?
No, arbitrage works only on real accounts. This feature isn’t available in demo mode.

Arbitrage is a complex but powerful tool for those willing to learn and act methodically. Success depends on understanding the mechanics, proper risk assessment, and disciplined position management.