Arbitrage Trading in Crypto: Is It Still Profitable?

 

Crypto Arbitrage Strategies: An Overview

There are two main types of crypto arbitrage strategies that are widely deployed in the cryptocurrency market. But how much money can you actually make from these strategies? Are they easy to carry out, and what risks do you need to be aware of? Let's explore these questions in detail.

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Funding Arbitrage: A Popular Strategy

The most popular type of arbitrage trade within crypto is funding arbitrage. This can be executed directly through exchanges or by investing in tokens issued by projects that perform the arbitrage for you, passing the yields back to you after taking their cut.

What is Arbitrage?

Arbitrage involves taking zero or minimal risk in trading. Unlike traditional buying or selling where price movements affect gains and losses, arbitrage focuses on extracting yield from market inefficiencies.

How Funding Arbitrage Works

1. Delta Neutral Position:
   To achieve funding arbitrage, you need to create a delta neutral position, where your exposure to price movement is eliminated.

   • Step 1: Buy crypto on the spot market (e.g., 1 BTC long).
   • Step 2: Sell the equivalent amount in the futures market (e.g., 1 BTC short).
     This cancels out price risk since gains and losses from price movements are neutralized.

2. Funding Fees:

   • In the crypto futures market, a funding fee is either paid or received depending on your position. Typically, longs pay the funding fee, and shorts receive it. By holding a short futures position, you can earn this fee without taking price risk.

Risks of Funding Arbitrage

• Platform Risk: Using centralized exchanges exposes you to risks like insolvency or regulatory issues.
• Opportunity Cost: While arbitraging, you might miss out on larger gains from price appreciation in bull markets.
• Funding Rate Fluctuation: The funding rate can change, potentially leading to lower yields or even costs.

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Spread Arbitrage: Another Opportunity

Spread arbitrage involves exploiting the price difference between the spot market and futures contracts with specific expiry dates.

How Spread Arbitrage Works

1. Spot-Futures Price Spread:

   • Buy crypto in the spot market.
   • Simultaneously sell the equivalent amount via a futures contract with a fixed expiry.

2. Yield Potential:

   • The spread between the spot price and the futures price represents the arbitrage opportunity.
   • This is effectively a fixed yield earned over the contract's duration.

Risks of Spread Arbitrage

• Lower Returns: Yields may not justify the locked capital, especially compared to long-term holding during bull markets.
• Platform Risk: Funds remain tied up on a centralized exchange until the contract expires.

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Automated Arbitrage Bots

Many exchanges, like Binance and OKX, now offer automated trading bots for arbitrage strategies. These platforms simplify the process by calculating the required spot and futures positions for you.

Example: Binance Arbitrage Bot

• Choose "Positive Carry" to benefit from funding fees on short futures positions.
• Enter your desired investment amount, and the platform executes the strategy.
• Real-time performance and yields are displayed for easy monitoring.

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Third-Party Projects and Additional Risks

Projects like Athena offer to manage arbitrage strategies for users. However, this introduces additional risks:

• Counterparty Risk: You’re relying on an unregulated third party to manage funds and strategies.
• Regulatory Risk: These projects may face legal issues, impacting fund availability.