How to Arbitrage with Binance Margin
Introduction
As a Binance trader, you have the power to profit from price differences between Binance and other crypto exchanges. This can only happen if you study the markets on a regular basis and be well informed about the potential to make profit before you enter the actual trading. With this kind of knowledge, you can exploit the arbitrage opportunity until it ceases to exist.
Arbitrage profits are often thin these days because there are a lot of traders scouting for this opportunity and thus tightening the competition. An average arbitrage profit would depend on the speed at which you carry out your trading and the available trade volumes for a particular crypto asset.
Disparity in prices is a norm
Ideally, the value of any crypto asset irrespective of where it is traded should remain the same but practical trading experience points otherwise because certain factors could influence traders to trade in different prices. For example, a trader who bought an asset at a very cheap price would want to dispose of it at 50% profit and not wanting to wait to make 100% profit.
Higher volumes larger profits
Arbitrage trading involving a high volume usually gives a reasonable profit than when the volume of the traded asset is low. Example: Buying and selling a $100,000 worth of a crypto asset while arbitraging gives you a bigger profit than when you trade the same asset with a volume of $1000.
Types of Arbitrage
There are several types of arbitrage in the traditional financial markets where stocks, commodities and fiat currencies are traded on a daily basis; nonetheless in the crypto ecosystem, you would come across exchange rate arbitrage, funding rate arbitrage and triangular arbitrage.
Exchange rate arbitrage
Exchange rate arbitrage is buying in one exchange and selling in another exchange to exploit the price difference of a crypto asset in order to make a profit. This is possible because the price of the same crypto assets varies on book orders across the various crypto exchanges. It is also called retail arbitrage
Funding rate arbitrage
Funding rate arbitrage has to do with protecting your purchased crypto from risks of price swings with a futures contract shorting by using the same crypto which is funded at a lower rate compared with the price which you bought the crypto.
Triangular Arbitrage
Triangular arbitrage is a profit making potential that occurs when you buy a crypto asset using three currencies and then converting back to the first asset taking advantage of price differences.
There is risk in arbitrage as there is profit.
Contrary to some belief that says arbitrage trading has a zero risk, arbitrage trading is a low-risk activity and a Binance account user should be aware of this. Execution and liquidity risks are the popular types of risks associated with arbitrage trading.
Execution risk
Execution risk is a situation where the price differences you are capitalizing on cease to exist before you sell the crypto you have purchased. Factors that could influence execution risk is slow execution, slippage, sudden raise in volatility and high exchange charges.
Liquidity risk
Liquidity risk is an occurrence where there is no or an insignificant trading volumes in one or both exchanges that you want to carry out your arbitrage trading (buyers and sellers).This translate to longer waiting and slow execution time and before you know it the arbitrage is over.
When to be cautious about arbitrage
A general caution to take when doing arbitrage is to avoid transferring slow transaction crypto assets. You should also plan before executing any arbitrage trade by taking into consideration the various risks factor that could mar your arbitrage opportunity. Do not limit your arbitrage trading to a few crypto assets but rather you should diversify your crypto portfolio in order to make moderate profit.
Use hedging strategy to secure your assets
You should use hedging strategy to protect your potential losses even though this might decrease your profits but it’s better than losing all your assets. Lastly, limit your losses by avoiding gambling on arbitrage chance.
What next?
This write up has introduced the theme and in the rest of it, we shall held straight to examine what is an arbitrage, what is margin, the benefits of arbitrage and how to arbitrage with margin
photo credit: Kanchanara
What is Arbitrage?
Arbitrage is a market scenario where an asset is purchased and immediately sold using the advantage of a slight price difference in order to make a profit. This asset can be bought in one market and sold in the same market or it could be purchased in Market A and sold in Market B.
It has been an old tradition
Arbitrage has a long history and has been practiced where commodities, derivatives and stocks are traded. Crypto arbitrage is a term coined to specifically define the arbitrage that occurs with price differences across crypto exchanges.
Binance is the largest crypto-market with the highest liquidity in the world and off course such arbitrage opportunities can occur on the Binance market especially with Binance Margin trading. Arbitrage occurs due to market ineptitudes. It is a mechanism that exploits these market inadequacies but as well corrects them.
Impact of technology on arbitrage
Technological advancements have cut down the prolonged duration of arbitrage opportunities to but a span of few minutes before prices of an asset is regularized in crypto markets. However, Arbitrage provides the crypto-trader the luxury to make a profit with a little risk.
Example 1
Example of an arbitrage can be inferred here: Mr. Jill noticed that BUSD is being traded on Gate.io marketplace at 0.95USD at 11 am while at the same it is being traded on Binance Marketplace at 1.02USD. The price difference here is 0.07 and this is the arbitrage that Mr. Jill wants to capitalize upon. He bought 5000USD worth of BUSD on Gate.io marketplace, transferred all the quantity to Binance market and immediately sold at 1.02USD and made about 368USD profit.
Example 2
Another example worth making is that of an Arbitrage that can occur within one market only. Lady Ivy used 10,000 BUSD to purchase ADA on Binance at the market price of 1.3 BUSD and she immediately placed a limit market sell order of 1.5BUSD per ADA. After about 30 minutes, the market forces drove ADA price to 1.5USDT and her sell order was filled and completed, netting her an estimated profit of 1,538 BUSD.
Taking advantage of arbitrage opportunity gives arbitrage traders the desired profits they wanted before entering the markets but they need to execute arbitrage trading with great speed and enough capital to maximize these profits. However each trader should be on the lookout for the factors that could pose as risks for their arbitrage trading.
What is Binance Margin?
Binance Margin trading gives you the privilege to arbitrage-trade and this often comes through leverage trading. Binance margin is one channel where you can get crypto loans from, once you are a verified Binance account user.
The fund pool from which Binance margined loans are derived from various pools of funds provided by merchants, high volume traders and third parties through various saving, staking and loan models coordinated by Binance.
Taking advantage of market volatility
Binance traders take advantage of market volatility by using the technique of leverage to magnify it. Borrowing is either done manually or automatically. Trading on Binance Margin gives the trader the advantage to auto-borrowing. Binance traders are aware that trades conducted on the margined market are of two types: Isolated Margin and Cross Margin
Just like in other forms of Binance loans, crypto assets are used as collateral for loans that you want to take on Binance margin. Maximally, you can borrow 10X the quantity of your available crypto assets and also be able to move crypto assets worth 2X the value of your debt.
Liquidation is another risk
Liquidation is a risk that a Binance margined trader should be conscious of. This is because even margin trading Gurus can inevitably incur losses as a result of unpredictable market conditions. However the first thing to do before you can borrow in margin is to open a margin account.
BTC value of the assets that you want to use as collateral is utilized to determine the highest quantity that you can borrow. This is an automatic calculation done by the system. Even the individual borrow limit and the hourly interest for your borrowable asset are all determined by the system
Before you begin trading, please note that you are required to complete a short quiz. All users must obtain a 100% passing rate before trading on margin.
Benefits of Arbitrage trading
Arbitrage trading has some advantages when it is carried out by a competent trader. The Binance trader should as a matter of fact understand the general benefits of doing arbitrage whether it is on Binance platform or in other crypto exchanges. The following are the listed benefits of arbitrage trading:
1. Crafts liquidity in the respective crypto markets where these crypto trading activities occur
2. provides the essential balance for fair functioning of crypto markets due to variation in price for the same crypto asset
3. Price of dual-listed trades are stabilized due to pumping and dumbing mechanism between two or more markets
4. It is a low-risk trading activity
5. Can be supported using high frequency trading algorithms
6. There are lots of crypto exchanges where arbitrage trading can take place, over 300
7. Developing crypto markets pave way for inefficiencies which in turn provide arbitrage opportunity
8. The Presence of Volatility due to market forces and decentralization increases the spread creating more arbitrage
9. Arbitraging with margin is simple and ease to engage in
How to arbitrage with Margin Trading
The presence of leverage on Binance margin gives the Binance trader the arbitrage opportunity that many other arbitrageurs outside the Binance platform are looking for. Let us use this illustration: You have 10 USDT and are looking for an arbitrage opportunity.
As you already know, there are various forms of arbitrage. Now to harness the arbitrage opportunity which Binance margin trading is offering you, move your 10 USDT from your Binance spot wallet to your Binance Margin wallet. On the Binance Margin page, you can use either cross margin or isolated margin to leverage your trade by borrowing additional funds up to 15X depending on your trading pairs.
A 15X your original fund would magnify your profits by 15X. Example: suppose when you traded with your 10USDT, you were able to make a profit of 75 cents per transaction. With a 15X of your original amount you would be using 150USDT to trade and that is a profit of $11.25 profit per transaction.
How to use Binance margin to execute Arbitrage trade
At times, the funding rate on futures pairs can be unstable thereby promoting an arbitrage opportunity. E.g you can utilize margin to short BCH/BUSD during a negative funding rate of BCH/BUSD perpetual and use a long futures BCH/BUSD perpetual trade to generate a profit. This takes advantage of market movements and not reliant on assets price and placing the two trades in opposing directions minimizes your risks. This another way to arbitrage using margin trading
Steps to using Binance Margin for Arbitrage
From your Binance App
1. Maintain your login protocols. After logging into your Binance app
2. Find ‘wallet’ from the right lower foot on the homepage and click on it
3. Tap ‘Margin’ to display the margin page with several features including ‘Borrow’ ‘Repay’ and ‘transfer’
4. Click ‘Transfer’ to enable you move your collateral asset to margin wallet. Adjust wallet movements properly E.g from Spot wallet to Isolate Margin
5. Adjust to the appropriate collateral you want to transfer to margin wallet E.g HNT
6. Enter the amount of the collateral asset you want to transfer to your margin wallet from your spot wallet E.g 100
7. Click on ‘confirm transfer’ to move your collateral asset to Margin account
8. Return to Margin home page, click on ‘Borrow’ Button
9. Enter the appropriate amount that you want to borrow according to quantity of your collateral and your margin tier
10. Click ‘Confirm’ Button to complete your borrowing process
11. Tap on the appropriate pair you want to use for margin trading E.g HNT/USDT
12. Click on ‘Trade’ to display the margin trading interface
13. Adjust your parameters : limit or market, amount, auto borrow, auto repay etc
14. Begin to margin trade: Tap on buy button if you want to long and sell button if you to short.
Conclusion
Arbitraging with Margin could generate moderate profits during market volatility and this could be done in two ways: taking advantage of the margin leverage levels and hedging using Binance margin and Binance futures to simultaneously short and long trading pairs respectively.
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