Cryptocurrency Spot -Futures Arbitrage Strategy Explained

LBank Exchange
4 min readAug 1, 2023
Cryptocurrency Spot -Futures Arbitrage Strategy Explained

Cryptocurrency trading strategies play a vital role in guiding traders through the dynamic crypto markets, empowering them to reduce losses and optimize profits. These strategies incorporate an array of powerful tools, including sophisticated trading software, insightful charts, and signals. Moreover, traders leverage tactical approaches such as stop loss orders, automatic entry orders, and the principle of leverage to enhance their trading outcomes.

Among the essential components of an effective trading strategy is Spot-Futures Arbitrage, which leverages minute price differences of digital assets across various markets or exchanges. It capitalizes on these discrepancies and allow traders to seize opportunities and bolster their overall futures trading success. Lets explore how it works but first, what is arbitrage trading?

What is Arbitrage Trading?

Arbitrage has been a time-honored trading strategy in traditional financial markets well before the inception of the crypto market. However, there is currently more buzz surrounding the possibility of lucrative arbitrage opportunities within the cryptocurrency industry.

Arbitrage provides traders with unique opportunities to profit from price discrepancies in securities, particularly in the stock market. For instance, you can purchase an asset on the LBank exchange for $10 and sell it on another exchange for $11, locking in a profit of $1.

Arbitrage involves purchasing and selling identical or similar assets in two different markets at different prices that provide an advantage. The term “similar” should be understood broadly, as the arbitrage may involve several derivatives. Two essential features of these transactions are commonly highlighted by this definition.

What Are Perpetual Futures Contracts?

A perpetual contract is a type of crypto futures contract that does not have an expiration date. Similar to a traditional futures contract, it is a derivative that derives its value from an underlying crypto asset.

In a perpetual contract, traders can buy or sell the underlying crypto asset at a pre-agreed price and close their position whenever they wish. The pre-agreed settlement price is determined at the time of opening the contract and is based on the price of the crypto asset.

Apart from the spot market, numerous exchanges provide perpetual futures contracts, enabling traders to leverage their positions up to 125 times. This increased leverage amplifies the volatility in the cryptocurrency market. On the flip side, the discrepancies between various markets create ample opportunities for arbitrage. By capitalizing on these inefficiencies, traders can easily achieve annual percentage returns (APR) ranging from 15% to 50%.

Perpetual contracts allow traders to speculate on the future price movements of the underlying cryptocurrency. For example, if BTC is currently trading at $30k and a trader expects it to reach $40k within a month, they could buy or open a futures contract for 1 BTC at $30k with an expiration of one month. However, if the spot rate of BTC rises to $38k after 20 days, the trader could close their position and register an $8k profit without waiting for it to reach $40k.

Spot-Futures Arbitrage Strategy

This is a futures trading strategy that focuses on the difference between the spot price of an asset and the price of a futures contract for that same commodity. This price difference is called the basis. Traders initiate “long the basis” trades when they anticipate the basis to increase, and “short the basis” trades when they expect the basis to decrease. The main objective of basis trading is to capitalize on the expected change in the basis to generate profits.

The concept of Spot-Futures Arbitrage revolves around identifying key price disparities between the spot market and the derivative market, with the anticipation that these prices will eventually converge. In the crypto market, traders can execute two potential trades using this strategy: Long and short positions.

For instance, if the ETHUSDT is trading at $2,200 while the spot price is $2,000, a trader could open a short position on the futures, expecting them to decrease and align with the spot price of $2,000. On the other hand, if the futures price is $2,000 and the spot price is $2,200, a trader could open a long position on the futures, anticipating that their value will rise to match the spot price.

How to trade Spot-Futures Arbitrage on LBank

To find a cryptocurrency with a futures derivative, navigate to the LBank “Markets” page then switch between the “Spot” and “Futures” options at the top of the page to explore eligible cryptocurrencies.

Analyzing Price Differences

Once on the spot and futures pages, analyze the price differences between the spot and futures prices of the selected cryptocurrency. If the futures price is lower than the spot price, consider taking a long position on the futures. Conversely, if the futures price is higher than the spot price, contemplate a short position on the futures.

Buying Spot Assets

To initiate the trade, begin by purchasing the underlying asset on the spot market. For example, if you decide to buy Bitcoin, you will directly own Bitcoin in your wallet immediately after the purchase. LBank offers different order types, including limit, market, and conditional orders, to execute your spot trade.

A limit trade enables you to purchase the asset when the market price reaches a specified level.

Buying Futures Contracts

Futures contracts are not the underlying asset but rather leveraged positions that can be bought as contracts. When you visit the Bitcoin futures page, you’ll find the latest contract price for Bitcoin. LBank grants users the flexibility to trade with leverage of up to 125x.

Wrapping Up

Overall, Spot-Futures Arbitrage is a powerful tool in the alternative investment arsenal that can provide investors with low-risk returns. However, it requires high transaction volumes to be effective, since the yield is usually small.

Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.

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