Ultimate Crypto Arbitrage Guide
A full walkthrough of all the arbitrage strategies and how they're pulled off
Introduction
Let’s start with the textbook basics - the definition. What is arbitrage afterall? Well, the dictionary will give you this definition:
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
I’d say this is a fairly good definition for arbitrage in the traditional sense, but in the modern sense… I’m not really sure this is true. Most advanced arbitrage trading doesn’t hedge the other side of the trade simultaneously at all. If you are in and out of the position in a couple seconds, then why would you even care about being hedged? Especially if you know that the side you are trading is the one doing all the moving.
Let’s say we have two exchanges. ShitEx and MegaEx. MegaEx trades 500 billion USD a day, ShitEx trades about 500 million USD a day. If they diverge do you really expect that MegaEx and ShitEx will both meet in the middle? Probably not… In fact, ShitEx will do almost all of the moving, which we can round to 100% of the moving when we consider that we really only care about moves that occur in excess of our cost to trade (which is very non-trivial for this kind of trading).
This is just the introduction so we’ll avoid diving into too much of the advanced weeds but you can already see from this example that the textbook definition isn’t quite what arbitrage trading looks like in practice. In today’s article, I will take a walk through all the different forms of arbitrage trading and what it realistically looks like to trade these opportunities. Not simply taking the textbook approach, but showing how real money gets made by professional arbitrageurs.
Index
Introduction
Index
Types of Arbitrage
Where can *I* find alpha?
Execution
When should you hedge?
When you have to predict
Incompletes
Normalization
Reducing trading costs
Trading more things
Leverage & Borrowing
Funding Arbitrage
Spot Arbitrage
Perpetuals Arbitrage
Triangular Arbitrage
Geographic Arbitrage