Cryptocurrency Arbitrage on Exchanges: The Complete Trading Guide

Arbitrage on exchanges is one of the most attractive strategies for traders seeking to generate profit with minimal risk. This trading scheme is based on exploiting price differences of the same asset across different markets or between various types of contracts.

The essence of arbitrage: how riskless trading works

Arbitrage is an investment strategy that allows for capturing short-term price discrepancies. In the cryptocurrency market, this can occur between the spot market and derivatives markets (futures, perpetual contracts), or between different exchanges.

The main idea is simple: if the same asset is cheaper on one market and more expensive on another, a trader can simultaneously buy it at the lower price and sell at the higher price, earning on the difference. The key advantage is minimizing market risk through hedging positions in opposite directions.

Financial arbitrage: earning through funding rate differentials

One of the most popular ways to apply arbitrage on an exchange is by utilizing discrepancies in funding rates between the spot market and perpetual contracts.

How does this work? When buyers dominate the market, the funding rate is positive. This means that traders with long positions pay a fee to traders with short positions. Savvy market participants can profit from this: they buy the asset on the spot market and open a short position in perpetual contracts for the same amount. As the price rises, gains on the spot offset losses on the short, but the trader earns the funding fee — this is called positive arbitrage.

Practical example: Suppose the BTCUSDT perpetual contract has a funding rate of +0.01% per hour. An investor buys 1 BTC on the spot market at 30,000 USDT and simultaneously opens a short position in perpetual contracts for 1 BTC. If the price rises to 31,000 USDT, the profit on the spot is 1,000 USDT, but the short position incurs the same 1,000 USDT loss. However, the trader earns the funding fee, profiting from the fee collection.

When the funding rate is negative (more sellers, fewer buyers), the logic reverses: the trader opens a short on the spot and a long in the contracts, earning funding payments in the opposite direction.

Spread arbitrage: profit from price discrepancies

The second main type of arbitrage on exchanges involves trading based on spreads between different contract types or markets.

If the BTC price on the spot market is lower than the futures contract price (BTCUSDC), an arbitrage opportunity arises. The participant can buy BTC cheaper on the spot and simultaneously sell it at a higher price via futures. When the contract approaches expiration, the futures price converges with the spot price, and the spread narrows, allowing the trader to lock in profit.

This method is especially attractive for large orders, as it helps manage costs and avoid significant slippage during execution.

Key features of modern arbitrage

Tools for arbitrage on professional exchanges offer several innovations for trader convenience:

Real-time opportunity monitoring. Trading pairs are ranked by funding rate size or spreads. This allows quick identification of the most promising deals without manually tracking all options.

Simultaneous order placement. The system enables placing orders on both markets at the same time with high execution accuracy, avoiding slippage and delays that could wipe out profits.

Automatic rebalancing. If an order on one side is partially filled and the other fully, the system automatically adjusts positions with market orders every 2 seconds. This is critical for reducing liquidation risks.

Flexible collateral options. For arbitrage, over 80 different assets can be used as margin, providing traders with greater flexibility in capital management.

How to start arbitrage trading: step-by-step guide

Step 1: Select an asset. Go to the trading tools section and find arbitrage. Study the ranking of trading pairs by funding rates or spreads, and choose the asset with the most attractive indicators.

Step 2: Determine the direction. Decide whether to open a long or short position on the first pair. The system will automatically set the opposite direction for the second pair. Remember, volumes on both sides should be equal.

Step 3: Choose order type. Decide whether to use limit or market orders. When entering the price, the current funding rate or spread size is displayed — this helps estimate potential profit.

Step 4: Enter volume and enable rebalancing. Specify the order size — the system will automatically set the corresponding volume for the second part. Turn on the smart rebalancing feature (usually enabled by default).

Step 5: Confirm and monitor. Execute the trade by clicking confirm. Then, track execution in the active orders section.

Step 6: Manage positions. After full execution, you can view your contract positions and spot assets. Income from funding rates will be reflected in the transaction history.

Risks and features of arbitrage

Although arbitrage is considered a low-risk strategy, it cannot be completely risk-free:

Liquidation risk from partial fills. If orders are executed unevenly, imbalances between positions can increase liquidation risk. That’s why automatic rebalancing is so important.

Slippage during rebalancing. When the system places market orders to align positions, the price may deviate from the initial, slightly reducing profit.

Insufficient margin. If there’s not enough free margin to open positions on both markets simultaneously, the order will not execute.

Responsibility for position management. Arbitrage tools do not automatically close positions. Traders are responsible for timely management and closing of trades.

When to use arbitrage on exchanges

Arbitrage is especially useful in the following situations:

• When a clear spread exists between trading pairs, allowing quick locking of short-term discrepancies and reducing slippage.

• When trading large volumes. Simultaneous order placement minimizes market impact and manages costs.

• When implementing complex multi-step strategies or needing to close multiple positions simultaneously with high precision.

• During volatile markets, requiring quick actions to lock in opportunities before spreads converge.

Calculating potential profit

To evaluate arbitrage attractiveness, several key metrics are used:

Spread = selling price – buying price

Relative spread (%) = (selling price – buying price) / selling price × 100%

Annual Percentage Rate (APR) based on funding rate = (total funding rate over 3 days) / 3 × 365 / 2

Annual percentage rate based on spread = (current spread) / (max period until expiration) × 365 / 2

These calculations help quickly assess deal profitability and identify the most lucrative opportunities.

Frequently asked questions about arbitrage

Can I use arbitrage to close existing positions?
Yes, tools allow opening and closing positions simultaneously on both markets.

How to know when rebalancing will stop?
The function operates for 24 hours after activation. If orders are not fully filled within this period, the system automatically cancels remaining orders and stops.

What happens if I cancel an order on one side?
If rebalancing is enabled, canceling an order on one side will automatically cancel the opposite order and halt the strategy. If disabled, orders operate independently.

Why didn’t my order execute?
The main reason is insufficient free margin to open both positions simultaneously. Try reducing the order size.

What is the difference between positive and negative arbitrage?
With positive funding rates, you buy on the spot and open a short in contracts. With negative rates, you short on the spot and go long in contracts. The direction depends on who pays the funding fee.

Thus, arbitrage on exchanges is a powerful tool for profit in the crypto market, but it requires understanding its mechanics and constant risk management.