Crypto Arbitrage Glossary: 40+ Terms Explained

The practice of simultaneously buying and selling the same (or equivalent) asset in different markets to profit from a price discrepancy. In crypto, this includes price gaps between exchanges, funding rate imbalances, and spot-futures premiums. A pure arbitrage has no directional risk — profit is locked in regardless of price movement.

The price difference between a futures contract and the underlying spot price. Basis = Futures Price − Spot Price. In contango (bull market), basis is positive. In backwardation (bearish conditions), basis is negative. Quarterly futures basis converges to zero at expiry — this convergence is the source of basis trade profit.

The price difference between two related instruments or markets, expressed as a percentage. In arbitrage, the spread is the raw profit opportunity before fees. A spread must exceed round-trip trading fees to be profitable.

A position or strategy with no net directional exposure to price movement. Gains and losses from price changes cancel out across the two legs, leaving only the arbitrage income (funding rate, basis premium, or price gap) as profit. Most crypto arbitrage strategies aim to be market-neutral.

A specific type of market-neutral position where the total delta (sensitivity to price change) is approximately zero. In practice: a spot long and a futures short of exactly equal USD value creates a delta-neutral position. If price moves $1, one leg gains $1 and the other loses $1 — net delta = $0.

A market condition where futures price trades above the spot price. This is the normal state in crypto during bull markets, driven by high demand for leveraged long exposure. Contango creates positive basis — the primary condition for profitable basis trading and funding rate arbitrage.

A market condition where futures price trades below the spot price. Rare in crypto — usually seen during extreme fear or selling pressure. In backwardation, funding rates turn negative (longs receive payments from shorts). Standard basis trades become unprofitable; strategy must be reversed or paused.

A futures contract with no expiry date. Unlike quarterly futures, perps can be held indefinitely. The price is kept close to spot through a periodic funding rate mechanism rather than expiry convergence. Perps are the most traded derivative in crypto, accounting for the majority of daily futures volume.

A futures contract that expires on a fixed date — usually the last Friday of a calendar quarter (March, June, September, December). At expiry, the futures price converges exactly to the spot index price, and all positions are settled automatically. Used in basis trading to earn the fixed premium locked at entry.

The fair value price used by exchanges to calculate unrealized P&L and determine liquidation. Mark price is derived from the spot index price plus a funding basis component — it is designed to prevent market manipulation from triggering liquidations. Liquidation is triggered when your margin falls below the maintenance requirement based on mark price, not last traded price.

The spot reference price used by the exchange, typically a weighted average of prices from multiple major spot exchanges (e.g. Binance, OKX, Coinbase). The index price acts as the anchor that the perpetual's mark price tracks via funding rates.

The process by which a futures contract is closed at expiry. For quarterly crypto futures, settlement is cash-settled — no actual BTC or ETH changes hands. The final settlement price is the average spot index price over the last hour before expiry. All open positions are closed at this price automatically.

The periodic payment exchanged between long and short traders in perpetual futures markets, designed to keep the perp price anchored to spot. Positive funding → longs pay shorts. Negative funding → shorts pay longs. Paid every 8 hours on most major exchanges (00:00, 08:00, 16:00 UTC). Formula: Funding Rate = (Mark Price − Index Price) / Index Price × 100.

The actual dollar amount paid or received at each funding interval, calculated as: Funding Fee = Position Size × Funding Rate. Note that funding is charged on the notional position value, not on your margin. A $10,000 position at 1x leverage has a $10,000 notional value for fee calculation purposes.

The estimated funding rate for the next 8-hour interval, displayed in real time on exchange interfaces. This updates continuously based on current market conditions. Always check predicted funding — not just the last settled rate — before entering a position, as conditions can shift quickly.

A strategy that collects funding payments by holding a delta-neutral position: long spot + short perpetual futures. When funding is positive, the short perp leg receives payments from longs every 8 hours. Since both legs cancel out directionally, the funding income is the net profit. Also called a "cash and carry" trade when applied to perpetual futures.

The total USD value (or contract count) of all outstanding, unsettled futures positions across all traders. Rising OI = new capital entering the market. Falling OI = positions being closed. Rising price + rising OI signals strong bullish conviction. Rising price + falling OI signals a short squeeze or weak rally. For arbitrage, high OI + high funding usually means a strong opportunity to collect funding as a short.

The running total of buy volume minus sell volume over a time period. Positive CVD = more aggressive buying than selling. Negative CVD = more aggressive selling. CVD helps distinguish real demand from price moves driven by thin orderbooks. Used in conjunction with OI to confirm the conviction behind a price move.

The ratio of long positions to short positions held by traders on an exchange. L/S > 1 = more longs than shorts (bullish sentiment). L/S < 1 = more shorts (bearish sentiment or squeeze setup). Extreme readings in either direction often precede reversals. For funding arb, high L/S ratio correlates with high positive funding rates.

A visualization showing where large clusters of leveraged positions will be force-liquidated at specific price levels. Price often moves toward high-density liquidation zones as exchanges (and large traders) hunt stop losses. Useful for timing entry into arbitrage positions — avoid entering just before a likely liquidation cascade.

A multiplier that allows you to control a position larger than your deposited capital. 2x leverage = $1,000 margin controls a $2,000 position. Higher leverage amplifies both gains and losses, and brings the liquidation price closer to your entry. For funding rate arbitrage, use 1x leverage — there is no benefit to higher leverage, only additional liquidation risk.

The capital deposited as collateral to open and maintain a leveraged futures position. Your margin is at risk — if price moves against your position and your margin falls below the maintenance requirement, your position will be liquidated. Always keep 20–30% extra margin buffer beyond the minimum requirement.

A margin mode where the collateral for each position is kept separate. If that position is liquidated, only the isolated margin allocated to it is lost — your other positions and wallet balance are unaffected. Best for beginners as it caps your maximum loss per trade.

A margin mode where your entire available wallet balance is used as collateral across all open positions. This reduces the risk of individual position liquidations (more buffer available), but a large adverse move can drain your entire wallet. Use with caution — one bad position can affect everything else.

The price at which your futures position will be forcibly closed by the exchange because your margin has fallen to the maintenance margin level. For a short position, liquidation price is above your entry price. For a long position, it is below. Always know your liquidation price before entering any futures trade.

The risk that spot and futures prices do not converge as expected before or at expiry. For quarterly futures, this risk is minimal — convergence at expiry is guaranteed. For perpetual futures, basis risk manifests as funding rate risk: the rate may turn negative, causing your short position to pay longs instead of receiving.

The difference between the expected execution price of an order and the actual price at which it fills. Slippage occurs when market orders consume multiple price levels in the order book. Larger orders in thinner markets experience more slippage. Use limit orders where possible to avoid slippage eating into arbitrage margins.

An order that executes immediately at the best available price. Guarantees execution but not price. Taker fees apply (higher than maker). Best used when speed of execution matters more than precise price — such as closing a position quickly when funding turns negative.

An order that executes only at a specified price or better. Guarantees price but not execution. Maker fees apply (lower than taker). Use limit orders when entering planned positions — they reduce your fee cost significantly and can improve entry prices. Note: in fast-moving markets, limit orders may not fill if price moves away.

Maker: Places a limit order that sits in the order book and adds liquidity. Typically charged lower fees (0.01–0.02% on most exchanges). Taker: Places a market order that removes liquidity from the book. Typically charged higher fees (0.03–0.06%). Arbitrage profitability often depends on using maker orders — always check which fee tier applies to your execution method.

An order that automatically closes your position when price reaches a specified level, limiting maximum loss. In arbitrage, stop-losses are less common because positions are hedged — but they can be used on individual legs to cap losses in extreme scenarios (e.g. exchange downtime preventing one leg from closing).

A classic arbitrage strategy: buy (carry) the spot asset and simultaneously short the futures contract. Profit comes from the futures premium converging to spot at expiry (quarterly) or from funding payments (perpetual). Also called basis trading when applied to quarterly contracts. The position is market-neutral and profit is determined at entry.

Exploiting price differences of the same asset across two or more exchanges. Buy on the cheaper exchange, sell on the more expensive one simultaneously. The main challenges are: transfer time between exchanges, withdrawal fees, and execution speed. Best executed with pre-funded accounts on both exchanges to avoid transfer delays.

A strategy that profits from price inconsistencies across three trading pairs in a circular loop. Example: USDT → BTC → ETH → USDT. If the exchange rates across the three pairs don't perfectly cancel, a small profit exists. Highly competitive and usually requires bots to execute in milliseconds — less practical for manual traders.

A quantitative strategy that exploits temporary price divergences between historically correlated assets. Example: BTC and ETH typically move together — if ETH lags BTC in a rally, a stat arb trade might long ETH and short BTC, expecting ETH to catch up. More complex than funding rate arb; requires historical data analysis and risk modeling.

The identity verification process required by regulated crypto exchanges. Typically involves submitting a government-issued ID and sometimes a selfie. Required to unlock full trading features, higher withdrawal limits, and futures trading on most major exchanges. Complete KYC before depositing funds to avoid restrictions.

The ease with which an asset can be bought or sold without significantly affecting its price. High liquidity = tight spreads, low slippage, large orders executed cleanly. Low liquidity = wide spreads, high slippage, small orders move the market. For arbitrage, always trade on high-liquidity pairs (BTC, ETH) on top-tier exchanges to minimize execution costs.

The fee charged by an exchange to send crypto to an external wallet or another exchange. For cross-exchange arbitrage, withdrawal fees are a significant cost that must be factored into profit calculations. Using USDT on cheaper networks (TRC-20, BEP-20) reduces transfer costs compared to ERC-20.

The primary stablecoins used as base currency in crypto arbitrage. Most futures contracts are quoted in USDT (Tether) — called USDT-margined or linear contracts. USDC is increasingly available as an alternative. Using stablecoins as collateral means your margin value doesn't fluctuate with crypto prices, simplifying P&L calculation.