Key points
- Arbitrage is a trading strategy that involves executing two or more offsetting trades simultaneously or near-instantly.
- The aim is to profit from price discrepancies for the same asset across markets and trading platforms.
- It is generally considered low risk and does not require forecasting price moves.
- The trade-off for lower risk is thin margins. The strategy typically demands substantial capital to generate meaningful turnover.
Types of arbitrage
Arbitrage can take many forms. The principal ones are below.
Exchange arbitrage
The simplest approach: buy and sell the same asset across different exchanges or platforms as quickly as possible. If prices diverge, a trader might buy a coin for $100 on one venue and sell it for $101 on another. The $1 gap is the arbitrage opportunity—an exploitable market inefficiency.
Triangular arbitrage
This method uses multiple trading pairs on one or several platforms. It relies on a mispricing within a chain of conversions.
Suppose BTC/USD = $20,000, BTC/ETH = 0.05 BTC, and ETH/USD = $1,010. A trader buys 1 BTC for $20,000, swaps 1 BTC for 20 ETH, then exchanges 20 ETH for $20,200. Profit: $200.
Derivatives-based arbitrage
A more complex—and therefore riskier—approach that uses derivatives such as futures, options and hedging tools.
Typically, the trader buys the asset on the spot market while opening a short position in a perpetual futures contract. The key condition is a positive risk premium on the futures.
Returns come from funding payments, a mechanism in perpetual futures designed to keep the contract price aligned with the spot price. Funding is the periodic payment between longs and shorts, depending on the direction of the underlying price. It is not an exchange fee and is adjusted several times a day.
For example, if the current funding rate paid to shorts on BTC perpetual futures is 1%, an investor buys BTC on spot and opens an equal-sized short in futures. The position is market-neutral, and the trader’s profit would be 1%, credited when funding is paid.
Advantages of crypto arbitrage
Despite its complexity and high demands on working capital, arbitrage is regarded as a low-risk strategy with near-certain returns.
All costs and potential risks should be factored in before execution. There is no need to predict future prices: profits arise from momentary inefficiencies between platforms and instruments.
Arbitrage helps enforce fair market pricing on exchanges. In practical terms, such strategies tend to equalise prices for the same asset across otherwise separate markets.
Risks of crypto arbitrage
Any trading strategy—however robust it may seem—comes with obvious and hidden risks:
- Complex calculations. Arbitrage requires precise maths; a single wrong input can wipe out expected gains or even produce losses.
- High fees. Given the slim margins, even small platform or network fees can erode profits.
- Execution speed. Fast-moving markets and exchange latency demand near-instant action; fractions of a second can upend a profitable chain of trades.
- Technical risks. System hiccups can cause unfilled orders, trading halts or frozen terminals at the worst possible moment.
- Low asset liquidity. Because sizable capital is often involved, the order book may lack sufficient depth at the needed price levels, breaking calculations and adding costs.
What is P2P crypto arbitrage?
The crypto market has become more organised over time, shrinking price gaps across venues. With centralised order books and matching engines, bid-ask spreads on exchanges are low or minimal.
Peer-to-peer services can offer richer arbitrage opportunities. Trading there is decentralised: users deal directly and set their own prices, often based on individual needs. Quotes to buy and sell the same coin can vary widely, creating more room for arbitrage.