Arbitrage: A trading strategy that takes advantage of price differences in the cryptocurrency market

Arbitrage is an investment strategy that profits from price differences of assets across different markets. In the cryptocurrency market, discrepancies can occur between spot and futures, or among multiple futures contracts. Exploiting these differences through arbitrage has attracted many traders. This article provides a clear explanation of the basic mechanisms and execution methods of arbitrage.

Funding Rate Arbitrage: A Stable Source of Profit

Funding rate arbitrage involves simultaneously establishing opposing positions—long and short—on the same amount in spot and perpetual futures markets. The core idea is that holding both sides offsets risks from price fluctuations while earning periodic payments called funding fees.

Positive Arbitrage: When the funding rate is positive, traders can go long in spot and short in perpetual futures simultaneously. Short position holders receive funding payments.

For example, if the current funding rate for BTCUSDT perpetual is +0.01%, a trader buys 1 BTC in the spot market and sells 1 BTC in the perpetual market, balancing gains from price increases and decreases while continuously earning funding fees. Losses on one side are offset by gains on the other, minimizing market risk and securing profits.

Negative Arbitrage: When the funding rate is negative, traders can short in spot and go long in perpetual futures to profit from funding payments.

Spread Arbitrage: Profiting from Price Differences Between Markets

Spread arbitrage involves buying and selling the same asset simultaneously across different markets to profit from price discrepancies. For example, if BTC’s spot price is below the futures contract price, a trader can buy BTC in the spot market and sell a futures contract, capturing the difference.

This strategy is effective because futures prices tend to converge to spot prices as expiration approaches. Traders can realize profits as the spread narrows.

Large spreads can occur, especially when market liquidity varies or between exchanges in different regions. Arbitrage traders need to quickly identify these opportunities and execute trades efficiently.

Key Features of Trading Platforms: Efficient Position Management

Modern trading platforms offer features essential for arbitrage execution:

Identifying Arbitrage Opportunities: Rankings based on funding rates or spreads help traders quickly identify the most profitable currency pairs. High funding rates or wide spreads are easily spotted.

One-Click Order Execution: Allows placing both sides of a position simultaneously, minimizing price slippage and market impact.

Auto Rebalancing: Smart or automatic rebalancing monitors executed order quantities in real-time. If an imbalance occurs—say, one leg is partially filled—the system automatically executes market orders to restore balance. This reduces the risk of one position remaining unfilled long-term.

For example, if leg A is filled with 0.5 BTC and leg B only 0.4 BTC, the system automatically executes a 0.1 BTC market order to synchronize both legs. This rebalancing typically remains active for 24 hours, after which unfilled orders are canceled.

Support for Multiple Collateral Assets: Integrated accounts can use over 80 assets as collateral, enabling flexible position building, such as shorting futures with BTC collateral.

Steps and Precautions for Executing Arbitrage Trades

Basic steps to perform arbitrage:

Step 1: Asset and Strategy Selection
Choose currency pairs with high funding rates or spreads. Platforms rank multiple pairs to highlight the most profitable opportunities.

Step 2: Decide Position Direction
If funding rate is high, opt for positive arbitrage (spot long, futures short). If low or negative, choose negative arbitrage (spot short, futures long).

Step 3: Determine Order Types and Quantities
Select market orders for immediate execution or limit orders at specified prices. Usually, the amounts on both sides are equal but in opposite directions.

Step 4: Enable Auto Rebalancing
Activate automatic adjustment features to correct imbalances caused by partial fills.

Step 5: Confirm Orders and Monitor
Place orders and track their progress on active order pages. Once fully filled, review position details, spot holdings, and funding fee history.

Step 6: Manage Positions
After opening, actively monitor and manage positions and assets. Check position info on futures pages and account balances on spot pages regularly.

When to Use Arbitrage and FAQs

When is arbitrage most effective?

• When trading currency pairs with existing spreads, to lock in short-term profits and minimize market risk
• When executing large orders, to build opposing positions simultaneously and control costs
• When closing multiple positions, to ensure precise fills via arbitrage

How are spread and APR (annualized return) calculated?
Spread = Last traded price (LTP) of sell asset – LTP of buy asset
Spread rate = (LTP of sell asset – LTP of buy asset) / LTP of sell asset
Funding rate APR = absolute value of 3-day cumulative funding rate ÷ 3 × 365 ÷ 2
Spread APR = absolute value of current spread rate ÷ maximum period × 365 ÷ 2

Can arbitrage be used for position closing?
Yes. Arbitrage allows both opening and closing positions, serving as a hedge or for position liquidation.

What is forced liquidation risk?
If both sides are only partially filled, exposure between long and short can become unbalanced, risking forced liquidation. Enabling auto rebalancing is recommended, as it periodically checks fill status and executes market orders to correct imbalances.

What happens if smart rebalancing is disabled?
Without smart rebalancing, both sides are traded independently. You must execute both orders manually, and until both are filled, the positions remain unbalanced, increasing risk.

How long does smart rebalancing operate if orders are not fully filled?
If enabled, unfilled orders are canceled automatically after 24 hours, preventing long-term unfilled positions and ensuring safety.

Risks of Arbitrage Trading

Arbitrage does not guarantee profits and involves risks such as:

• Partial Fill Risk: Imbalanced fills can lead to forced liquidation.
• Market Liquidity Risk: Low liquidity may prevent orders from executing at expected prices.
• Slippage Risk: Market orders for auto rebalancing may deviate from initial prices.
• Collateral Shortage Risk: Insufficient margin in integrated accounts can prevent order completion.

Active position management and regular monitoring are essential. Understanding these risks thoroughly and implementing proper capital management strategies are crucial for successful arbitrage trading.