Cryptocurrency Arbitrage Strategies: Hedging in Crypto Arbitrage

Recently, we discussed the strategy of cryptocurrency arbitrage through withdrawal. Today, let's talk about the hedging strategy:

Hedging is the ability to reduce your risks when transferring, so when hedging, it doesn't matter what happens. Whether the price goes up or down, you earn the percentage you were aiming for. Let's provide you with an example to illustrate the hedging process. For example:

1. You buy 1,000 coins on the Bybit exchange for $1 and plan to sell them on another exchange, such as MEXC, for $1.05, which is a 5% profit.
2. During this transfer, you realize that the price may drop.

There's no guarantee that during these 5 minutes of the transfer, the price won't drop by 10%, 20%, or even 30%, especially if you're arbitraging some obscure coins.

In such a case, you use the hedging strategy, which allows you to reduce risks.

4. On MEXC's futures, you open a short position at a price of $1.05 for the same amount of coins you plan to transfer, i.e., 1,000.
5. You transfer the coins, sell them, and close the short position.

The essence of hedging is that when you make this transfer, it doesn't matter what happens to the market. If the coin drops, you make a profit from the futures but lose some percentage on the spot sale. If the coin rises, you make a profit on the spot, but lose slightly on the futures.

You make a profit either way.

1. If the coin drops to $0.80, and you planned to sell at $1.05, you'll earn from the futures everything you lost and the initial 5% you aimed for.
2. If the price doesn't change, you'll lose a small amount (about 0.1% on most exchanges) on the futures due to the fee paid when opening a trade, and some pairs may have a spread when opening a trade.
3. If the price rises, you make a profit on the spot. For example, you planned to sell at $1.05 but sold at $1.08. In this case, you'll close the futures trade with a loss of approximately -3%, possibly varying due to the fee. You still earn that 5%.

Key nuances of this strategy:

1. Not all coins can be traded on futures. Always check whether you can open a position for a specific coin.
2. It's also crucial to check the futures price to ensure it matches the spot or is more advantageous.

Often, during price increases of a coin with significant volatility, the price between spot and futures on the same exchange can vary significantly.

Keep in mind that if the prices differ, for example, you plan to sell on the spot for $1.05, but you can only open a short position at $1.03, in this case, you'll earn less. This is essential to consider.

It can also happen that the spot price is $1.05, but you open a short position at $0.99, and this trade goes into a loss.

These are the two main nuances to consider in the hedging strategy.

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