Common Forms of Arbitrage
Three forms appear frequently in crypto. First, cross-exchange arbitrage: capturing transient price differences for the same asset (e.g., BTC) across venues such as Binance and Coinbase. Second, cash-and-carry arbitrage: buying spot and shorting perpetual futures to harvest funding payments. Third, triangular arbitrage: cycling through three pairs (BTC/USDT, ETH/BTC, ETH/USDT) to capture deviations from no-arbitrage prices. All require automated execution because opportunities vanish faster than humans can act.
Practical Risks
Even strategies labeled 'riskless' carry several practical risks. First, exchange maintenance, withdrawal halts, or insolvency (as in the FTX collapse) can leave positions imbalanced. Second, deposit confirmations and withdrawal fees erode spreads. Third, stablecoin de-peg events create divergence between USDT-denominated and USD-equivalent prices. Fourth, in thin liquidity, executions slip away from theoretical prices. These non-price risks meaningfully reduce 'risk-neutral' returns in practice.
Relation to Efficient Markets
The Efficient Market Hypothesis (EMH) holds that arbitrage opportunities are eliminated almost instantly and cannot persist. Empirically, crypto markets have historically retained arbitrage opportunities longer than traditional finance, especially at smaller exchanges or during illiquid hours, where price gaps can persist for tens of seconds to several minutes. As institutional and algorithmic participants entered, however, spreads on major pairs across major venues have compressed year over year, with competition shifting toward execution speed, transaction cost, and capital efficiency.