"It's hedged, so it's safe." The most dangerous sentence in crypto arbitrage. Hedging reduces risk — but it doesn't eliminate it.
TL;DR: A hedge is only as good as your understanding of how it works and how it can fail. Low leverage (2-5x), excess margin on both sides, isolated margin mode, and knowing your liquidation prices are non-negotiable. "Hedged" never means "risk-free".
A hedge is a position that offsets the price risk of another position. In arbitrage, you're taking two opposite positions on the same asset — one long, one short. If the price goes up, your long profits and your short loses equally. If the price goes down, your short profits and your long loses equally.
In theory, you don't care about price direction. Your profit comes only from the spread between the two positions. In theory.
Your long is on Exchange A. Your short is on Exchange B. These are separate companies with separate accounts. They don't know about each other.
Exchange A sees: this person is long. If price drops 20%, they might get liquidated. Exchange B sees: this person is short. If price rises 20%, they might get liquidated. Neither exchange knows you're hedged.
A perfect hedge requires simultaneous execution. In practice, there's always a gap. You buy on Exchange A at 10:00:00.000 and sell on Exchange B at 10:00:00.350. In those 350 milliseconds, the price can move.
In futures positions, both legs accumulate funding every 8 hours. But funding rates differ between exchanges. Your net funding exposure changes every funding period. The payment mechanics are in the funding rate guide.
Spot-spot arbitrage has a period where you're completely unhedged: the transfer time. The moment you buy on Exchange A and before your tokens arrive on Exchange B, you're long with no hedge.
For short transfer times (BSC, Solana) and stable-ish tokens, the risk is small.
Keep funds on both exchanges. Buy on A and simultaneously sell on B from pre-positioned funds. Transfer to rebalance later.
Buy spot on Exchange A. Immediately short futures. Now you're hedged during the transfer. When tokens arrive on Exchange B and you sell, close the futures short.
Spot-futures is the most straightforward hedged arbitrage. Long spot on Exchange A + short futures on Exchange B. Your profit: the spread between spot and futures prices, plus or minus funding.
Your spot position has no leverage. Your futures position does. At 5x leverage on the short side, a 20% price increase doesn't lose you 20% — it loses you 100% of your futures margin. Your spot position gained 20%, but that's on Exchange A. Your futures position just got liquidated on Exchange B.
Both legs are leveraged. Both legs have margin requirements. Both legs can be liquidated independently.
Same leverage on both sides, 2-3x max. This gives you a liquidation buffer of 33-50%.
Don't use 100% of your available margin. Keep at least 50% extra.
Before entering any trade, calculate at exactly what price each leg gets liquidated. If those prices are within realistic daily ranges for the token — reduce leverage.
A perfectly hedged position is "delta neutral" — it has zero exposure to price movement. In practice, your hedge degrades over time due to funding rate changes, fee accumulation, slippage differences, and partial liquidation mechanics. Rebalance your hedge periodically.
Each position has its own margin pool. Liquidation of one position doesn't affect others. Safer for arbitrage.
All positions share one margin pool. More capital-efficient but dangerous — a liquidation on one position can cascade into others.
For arbitrage, use isolated margin on both legs.
If one leg gets close to liquidation: add margin immediately. Have USDT ready on both exchanges.
If the spread moves against you significantly: close both legs and take the loss. Don't hold and hope.
If an exchange has issues (downtime, frozen withdrawals): close the healthy leg to reduce exposure.
The most common and most destructive mistake. Your positions are hedged in terms of price direction, but NOT in terms of margin risk. At 50x, a 2% price move against one leg = liquidation. The hedge on the other exchange doesn't help because it's a separate account.
You enter a hedged position expecting to hold for 3 days. You calculated the spread profit but ignored funding. After 3 days of paying funding on both legs, your spread profit is gone.
You buy $1,000 spot and short $1,200 futures because the order book didn't fill evenly. You're not hedged — you're net short $200. Match position sizes as closely as possible. Keep the difference under 5%.
You calculate that the spread is 3% and your fees are 0.5%. Profit looks good. But you never check what price liquidates your leveraged leg. The liquidation price turns out to be 8% away, and the token has moved 8%+ intraday three times this week.
You open a hedged position and walk away. Funding rates change, margin ratios shift, exchange policies update. A hedge that was profitable on Monday can be losing money by Thursday. Check your hedged positions at least once per funding period.
The best arbitrageurs aren\'t the ones who find the biggest spreads. They\'re the ones whose hedges never blow up. The margin and liquidation math behind the 2-5x cap is in the 5x rule.
It is a position with zero exposure to price movement: the long and short offset each other. In practice the hedge degrades due to funding changes, fees, and slippage differences — rebalance it periodically.
Isolated margin on both legs: each position has its own margin pool, and one liquidation cannot cascade into the others. Cross margin is more capital-efficient but more dangerous for arbitrage.
On a 20% price rise the spot leg gains 20%, but the 5x-leveraged futures short loses 100% of its margin — liquidated, even though the position is “hedged”.
As closely as possible: buying $1,000 spot against a $1,200 futures short leaves you net short $200 — effectively unhedged. Keep the difference under 5%.
VoltArb calculates actual net profit using order book depth, slippage, fees, and funding rates.
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