What Is Cross-Exchange Crypto Arbitrage

Cross-exchange arbitrage is trading that uses differences in the price or funding terms of the same asset on different exchanges.

For example, a cryptocurrency can be bought more cheaply on one exchange and sold at a higher price on another. The difference creates an opportunity to earn if it covers the fees and other costs of executing the trades.

To do this, a trader combines operations on two venues into an arbitrage bundle. Depending on the strategy, the trades are executed simultaneously or one after another.

Where arbitrage opportunities come from

A cryptocurrency has no single price at which it can be bought or sold on every exchange at any moment. On each venue the price is formed by the trading of its own participants.

On exchanges with an order book, buyers' and sellers' orders are collected in the book. Participants set different prices and volumes, so the terms for buying and selling the same asset can differ between two venues.

Imagine two markets at opposite ends of a city. Each has its own sellers, buyers, stock and delivery terms. Even identical oranges can cost different amounts. Something similar happens with cryptocurrencies.

Differences between venues are driven by:

• supply, demand and available liquidity;
• large purchases and sales;
• restrictions, costs and speed of depositing and withdrawing assets;
• the specifics of trading instruments;
• calculation rules and funding payment schedules.

You do not need to establish the exact cause of every gap to find a bundle. But it helps to understand the restrictions of the venues: for example, an attractive price difference may persist because withdrawals of the asset are unavailable. In that case you can buy it, but you cannot transfer it to sell.

Types of arbitrage bundles

In this article we look at two types of market:

The spot market — the market where the asset itself is bought and sold.

The perpetual futures market — a market of derivative contracts that let you open positions on a rise or a fall in the asset's price without a set expiry date. For brevity, we will call them futures below.

These two market types give three main combinations:

Bundle type	Markets used
Futures — futures	Futures contracts on two exchanges
Futures — spot	A futures contract on one exchange and the asset itself on the other
Spot — spot	The asset itself on two exchanges

Bundles can combine centralised exchanges (CEX), decentralised exchanges (DEX), or venues of both types. The general idea stays the same, but execution methods, fees and restrictions differ.

How spot arbitrage works

One version of spot arbitrage consists of three steps:

1. Buy the asset on the exchange where it is cheaper.
2. Transfer it to the exchange where it is more expensive.
3. Sell the asset.

For example, buying one coin costs 100 USDT, and on another exchange it can be sold for 103 USDT. The difference is 3 USDT before trading fees and transfer costs.

However, the sale happens later than the purchase. While the transfer is in progress, the price may change and the favourable orders may disappear. So a difference spotted before the purchase does not yet mean it can be captured at the sale.

There is another option: place funds and assets on both venues in advance, so that you can buy and sell almost simultaneously. Then no transfer is needed for each individual trade, but the balances between the exchanges have to be restored from time to time. The specifics of execution and transfers affect the result of spot arbitrage.

How arbitrage with futures works

In a bundle with futures, you can work with a price difference without transferring the asset itself between exchanges.

To trade on prices converging, a trader opens two opposite positions:

• a long where it is cheaper: the position gains from a rise in price;
• a short where it is more expensive: the position gains from a fall in price.

Volumes are chosen so that the positions offset the overall market movement. For ordinary linear contracts, this means the same quantity of the underlying asset, taking contract size into account.

The price difference between the instruments is called the spread. In such a bundle, the trader expects a result from it narrowing.

Suppose a contract costs 100 USDT on exchange A and 103 USDT on exchange B. The trader opens a long on A and a short on B, each for one coin.

Later the price on A reaches 105 USDT, and on B — 106 USDT. When the positions are closed:

• the long brings 5 USDT;
• the short loses 3 USDT;
• the total result is 2 USDT before fees and funding.

Both prices rose, but the difference between them narrowed from 3 to 1 USDT. That is exactly what produced the positive result.

Convergence is possible under different market moves: the more expensive instrument may fall faster, the cheaper one may rise faster, or their prices may move towards each other.

In a spot — futures bundle, a similar structure is created by buying the asset on spot and opening a short on futures. This combination is also used in strategies for collecting funding payments.

Do you need to guess the direction of the price

With a balanced bundle, the result depends less on the overall rise or fall of the market. The trader focuses on how the prices of the two instruments change relative to each other.

But this does not make the profit known in advance. The spread may keep widening, the execution of one trade may be delayed, and a losing position may need additional margin.

Even with an offsetting profit on another exchange, an individual position can be liquidated: funds do not move between venues automatically. Opposite positions reduce directional market exposure, but they do not remove execution and liquidation risks.

Which differences traders use

Convergence of the price spread

The trader buys the cheaper instrument and sells the more expensive one, expecting to close the bundle when the price difference narrows. This movement is called convergence.

Divergence of the price spread

The opposite position is also possible: the trader expects the price difference to widen. This movement is called divergence.

This is trading on a change in the spread, and the result depends on whether the expected divergence happens. It cannot be treated as an arbitrage profit locked in advance.

Difference in funding rates

Funding is a periodic payment between holders of long and short positions in perpetual contracts.

With a positive rate, holders of longs usually pay and holders of shorts receive. With a negative rate, it is the other way round.

If the rates on two exchanges differ, the payments on one position may exceed the costs on the other. But rates change, and the final result also depends on the change in the spread and on trading fees.

Difference in funding payment times

Funding intervals and payment times can differ between exchanges. This creates additional ways to build bundles.

To compare them, take into account not only the size of the rate, but also the payment schedule, how long the positions are held, and the rules of the specific contracts. A funding payment is not an expiry: a perpetual contract has no set expiry date.

What the final result depends on

To assess a bundle, it is not enough to compare the last trade prices on two exchanges. You need to understand at what prices the required volume can actually be bought and sold.

The final result is made up of the result of both trades, the funding received or paid, and all costs: trading fees, transfer costs and, if borrowing is used, the cost of the loan.

So an arbitrage opportunity is a price or payment difference combined with the conditions under which it can be captured.

Where to learn more

If you are just getting to know crypto arbitrage, join the open Profit Cloud Telegram channel. There we break down trading mechanics, explain terminology and share experience with members of the community.