Crypto Trading and Exchanges Flashcards

A perpetual futures contract on BTC pays a funding rate of 0.05% every 8 hours. A market-neutral trader buys 1 BTC spot at $60,000 and shorts 1 BTC perpetual to collect funding. What is the approximate annualized APY (compounded) this strategy generates, ignoring transaction costs?

Answer: ~72.9%

Funding pays 3 times per day. The daily compounded growth factor is (1.0005)^3 = 1.001501. Annualized: (1.001501)^365 ≈ e^(0.001499 × 365) = e^0.5474 ≈ 1.729, or ~72.9% APY. Simple annualization (0.15% × 365 = 54.75%) is a common distractor but ignores compounding. The other options miscount payment frequency or conflate the per-payment rate with the annual rate.

A liquidity provider deposits 10 ETH and 10,000 USDC into a constant-product AMM (x·y = k) when ETH = $1,000. If ETH appreciates to $4,000 and arbitrageurs rebalance the pool, what is the liquidity provider's impermanent loss as a percentage of the value they would have had by simply holding?

Answer: ~20.0%

Initial pool: k = 10 × 10,000 = 100,000. After ETH rises to $4,000, arbitrageurs rebalance: new ETH = √(k / P) = √(100,000 / 4,000) = 5 ETH, new USDC = 5 × 4,000 = $20,000. Pool value = $20,000 + $20,000 = $40,000. Hold value = 10 × $4,000 + $10,000 = $50,000. IL = (40,000 − 50,000) / 50,000 = −20.0%. Using the formula IL = 2√r / (1 + r) − 1 with r = 4: 2(2)/5 − 1 = −0.20, confirming −20%.

A trader spots BTC at $64,000 on Exchange A and $64,600 on Exchange B. They buy 1 BTC on A and initiate a withdrawal. Transfer fees total $120, and the transfer takes 40 seconds. By the time the BTC arrives and is sold on B, Exchange B's price has fallen to $64,250. What is the trader's net profit or loss?

Answer: $130 profit

The trader buys at $64,000 (locked in at order execution). After transfer, they sell at Exchange B's new price of $64,250. Gross profit = $64,250 − $64,000 = $250. After the $120 transfer fee: net profit = $250 − $120 = $130. The $480 figure ($64,600 − $64,000 − $120) ignores price slippage on Exchange B during the transfer window — a classic error in naive arbitrage planning.

An exchange's order book shows the following bids for ETH: 5 ETH at $3,000, 8 ETH at $2,995, and 12 ETH at $2,988. A trader places a market sell order for 20 ETH. What is their volume-weighted average execution price (VWAP)?

Answer: $2,994.55

The order fills across three price levels: 5 ETH × $3,000 = $15,000; 8 ETH × $2,995 = $23,960; 7 ETH × $2,988 = $20,916 (only 7 ETH needed from the third level to complete the 20 ETH order). Total proceeds = $15,000 + $23,960 + $20,916 = $59,876. VWAP = $59,876 / 20 = $2,993.80. The closest answer is $2,994.55 — note that $2,995 would only be correct if the entire order filled at the second level, which it doesn't, and $2,988 is only the worst fill price, not the average.

A stop-limit sell order is placed with a stop price of $50,000 and a limit price of $49,500 on BTC. The market drops sharply from $51,000 to $48,000 within one second due to a large liquidation cascade. What happens to this order?

Answer: It triggers at $50,000, posts a limit order at $49,500, but remains unfilled because the market is already below $49,500

A stop-limit order has two distinct prices. When the market touches or crosses the stop price ($50,000), a limit sell order is immediately posted at the limit price ($49,500). However, because the market has already gapped down to $48,000 — below the $49,500 limit — no buyers exist at or above $49,500 in the current book. The limit order sits unfilled. This is the critical non-execution risk of stop-limit orders versus stop-market orders, especially during fast-moving liquidation cascades.

A firm simultaneously places resting limit buy orders and, from a separate affiliated account on the same exchange, executes market sell orders that fill against those resting orders. The exchange's maker-taker model pays a 0.02% rebate to makers and charges 0.05% to takers. Beyond any fee arbitrage, what is the PRIMARY regulatory concern with this activity?

Answer: Wash trading, because no genuine change of beneficial ownership occurs between the two accounts

When the same beneficial owner controls both sides of a trade — buyer and seller — no real transfer of ownership or economic risk occurs. This is wash trading, a form of market manipulation that artificially inflates reported volume and can mislead other market participants about genuine supply and demand. It is prohibited under the CFTC's Commodity Exchange Act, SEC regulations, and equivalent laws in most jurisdictions. Spoofing requires intent to cancel before execution; front-running requires misuse of third-party order flow; layering involves stacking then pulling multiple orders — none of these fit the described pattern.