Crypto Arbitrage: How It Works & Trading Strategies
What is Cryptocurrency Arbitrage?
Crypto arbitrage is a trading method in which you buy a specific cryptocurrency in one market and immediately sell it in another market, but this time at a higher price.
Therefore, it gives you the opportunity to profit from the price difference between the two markets when selling the same cryptocurrency on different platforms.
The process is self-explanatory. For example, if the price of Bitcoin is $12,000 and a platform like Binance sets its upper limit at $11,800, crypto arbitrage allows you to explore the possibility of price differences.
You can buy Bitcoin on Binance for $11,800, and then sell it on another market such as Coinbase for $12,000, earning $200.
What Are the Different Types of Crypto Arbitrage?
Spatial Arbitrage
In this type of cryptocurrency arbitrage, you need to use a quantitative data model to determine the arbitrage of various cryptocurrency statistical robots to obtain profits. Therefore, statistical arbitrage is a transaction based on mathematical models.
Spatial Arbitrage Without Transferring
Due to the risks associated with transportation costs and time frames, some traders try to avoid spatial arbitrage. They can make multiple bitcoins in one transaction and short bitcoins in another transaction, and then wait for the values of the two exchanges to converge in a hypothetical scenario.
This eliminates the need to transfer funds and tokens from one account to another.
Triangular Arbitrage
On the same exchange, triangular arbitrage uses the price difference between multiple cryptocurrency pairs. Investors use this method to buy a cryptocurrency and then exchange it for another cryptocurrency on the same exchange, which is undervalued compared to the first one.
Then, the investor will exchange the second token for a third cryptocurrency that is too expensive compared to the first. Finally, the investor will complete the transaction by exchanging the third cryptocurrency for the first coin.
How to Arbitrage Cryptocurrency
Whether you are a novice trader or an experienced investor, the benefit of crypto arbitrage trading is that today there are multiple platforms that can automate the process of finding and trading price differences across multiple exchanges. These “one-and-for-all” platforms can provide excellent passive income opportunities for traders looking for low-risk, non-interference trading solutions, including:
- Arbismart
- Pionex
- Cryptohopper
What are the Pros and Cons of crypto arbitrage?
Pros Of Crypto Arbitrage
1) Fast Profit
You can perform crypto exchange following the exchange is finished, which might require an hour or less. This is a lot quicker than customary exchanges where you purchase and store cryptographic money for later deal.
2) Wide Range of Opportunities
Today, there are numerous digital currency trades available. With such a huge number, there are broad mediation openings. As indicated by Coindesk, there are in excess of 391 digital currency trades on the planet today.
3) The Crypto Market is Still Developing
Cryptographic money isn’t yet well known, so the digital currency market is as yet in the beginning phases of advancement. Along these lines, there are many infringement, errors, and deficient data transmission among trades. There are additionally less digital currency dealers on the lookout and less rivalry, which prompts potential value contrasts.
4) Cryptocurrencies are Still Volatile
Albeit the main digital currency Bitcoin was dispatched by Satoshi Nakamoto in 2009, it is as yet one of the most shaky cryptographic forms of money available. This is because of changes in organic market and the way that tokens are decentralized. Since digital currencies are so temperamental, enormous value variances might happen between trades. This offers us a chance for discretion.
Cons Of Crypto Arbitrage
1) KYC Restrictions
To exchange on any cryptographic money trade, you really want to agree with the current KYC rules. Once in a while you want to have a ledger in the nation where the trade is found, or you might have to connect your financial balance and check your personality. It might require as long as 24 hours to confirm your record through KYC before you make an exchange.
2) Storing Coins
Since you really want to visit various trades for exchange, you might have to store your tokens on all trades. Since these encoded monetary forms are put away in web-based records, they are defenseless against programmer assaults. A portion of these more modest and less notable organizations likewise will quite often take tokens from clients. Thusly, you really want to comprehend this danger before you begin enrolling for digital money exchanging on lesser-known stages.
3) Fees
Cryptographic money trades don’t permit you to store, pull out or exchange free of charge. They charge a specific level of cash as a commission. Along these lines, you want to incorporate commissions when ascertaining benefits from exchange.
4) Large Trades Provide Better Profit
Later all material handling postponements and charges, the benefit of intervention might be tiny. To get tremendous benefits from exchange, you want to build your exchanging volume.
5) Withdrawal Limits
At the point when you make an enormous exchange, you should remember that the exchange has specific withdrawal limits. In this way, you can not pull out your digital money balance from your wallet around the same time.
6) Timing
Every cryptographic money exchange requires something like 10 minutes to finish and be confirmed by diggers. During this period, the market might be against you and you might lose potential exchange benefits. Much of the time, brokers didn’t create a gain, on the grounds that the market fell and the benefit transformed into a misfortune.
7) Slower Transactions
As the volume of exchanges in the worldwide digital money market builds, it takes more time to process and confirm exchanges. To move reserves rapidly, this might be a significant issue. Contrasted and Ethereum (ETH) exchanges, Bitcoin exchanges take more time to process.
8) Competition
There might be more merchants looking for exchange, which might bring about various exchanging volumes on various trades. It can likewise diminish the shot at others partaking in intervention.
How to choose cryptocurrency arbitrage software?
The following are the fees that need to be paid to use such software:
• The arbitration function is available for users who subscribe to the premium version ($44/month) and the professional version ($110/month).
• Users of this arbitrage robot must pay 0.006 to 0.015 bitcoins within three months (discounts for semi-annual and annual plans). The more you pay, the more features are available.
• In this service, arbitrage applies to Adventurer (49 USD/month) and Hero (99 USD/month) subscriptions.
What Are the Dangers of Crypto Arbitrage?
There are several risks along the way:
- When your Bitcoin goes to South Africa, the price drops, offsetting your expected profit;
- Bitcoin delivery from foreign countries to local exchanges is delayed (increased market share will increase the risk of loss)
- Failure, hacking or bankruptcy of foreign or local exchanges (for example, what happened to the failed iCE3 exchange)
- The owner of the exchange avoids your cryptocurrency (this has reportedly happened to the Turkish exchange Thodex)
- Your bitcoins were sent to the wrong address and lost forever.
Is Crypto Arbitrage Profitable?
At the time of writing, there is a difference of $6 per BTC between two popular cryptocurrency exchanges. You can profit from these differences, such as 0.2% to 2.5% per day (US$10 to US$50). If you focus on about 10 of these spreads every day, you can earn at least $1,000 a week.
To conduct cryptographic arbitration, you need the right set of tools and knowledge. Without this, it is almost impossible to take advantage of this opportunity. When the spread can be larger, the situation is possible, which can bring huge profits. In the above example, we only looked at the situation of space arbitration. This combined with other crypto arbitrage strategies can generate more profits.
If you are a daytime cryptocurrency trader and the market has not changed much, you can always profit from arbitrage. If you persist and quickly seize profit opportunities, you can get considerable profits from arbitrage. The most common type of arbitrage used by people is spatial arbitrage, where they buy cryptocurrency on one exchange and sell it on another exchange. But sometimes this may be completely ineffective.
Is Crypto Arbitrage Legal?
Yes, usually. The practice of arbitration is generally encouraged because it can improve market efficiency. Moving items on exchanges should help balance prices on different exchanges. However, some jurisdictions have reservations. If you are a U.S. citizen and use a foreign cryptocurrency account, you must ensure that this account is reported to the IRS. Otherwise, you may be in big trouble. As long as your paperwork is in order, you may be fine. As with anything, it is best to consult a lawyer.
Important Things to Know Before You Try It
1) New Listings
Always keep an eye on the list of new cryptocurrencies. If a cryptocurrency is traded on an exchange for the first time, the exchange may have little demand for the token.
2) Avoid Transferring BTC
As we all know, Bitcoin transactions take a long time. Since arbitrage requires you to trade as quickly as possible, a slower BTC trading time will reduce your chances of trading profitably. You might consider altcoins like ETH, which provide faster transactions.
3) Plan Strategically
Before you start arbitrage, you need to consider various factors and issues. We recommend that you plan the amount of funds for each transaction. What percentage of the profit will you get? Which commissions can lower your bottom line?
4) Keep Monitoring the Market
Arbitration opportunities can appear at any time of the day. You need to observe the market to discover them. During market volatility, the possibility of price differences is very high, so you need to pay close attention to the latest news and events that may cause such changes.
5) Diversify
If you limit your trading to two or three exchanges, you are likely to hardly notice arbitrage opportunities, or only make a small profit in any opportunity that arises. In order to obtain considerable profits, please make sure that you trade on various exchanges. It also reduces the potential risk of all eggs eventually appearing in the same basket.
6) Limit Losses
Since the cryptocurrency market is very volatile, always make sure that you trade quickly or not at all. Sometimes, in order to make money, the risks far outweigh the benefits. Rather than risk arbitrage opportunities, it is better not to lose money.
7) Hedge Strategies
To protect yourself from sudden market changes, you can use hedging strategies. Hedging protects you from potential losses, but ultimately reduces your potential profits. You can think of hedging as an insurance policy that protects you from imminent losses.
Conclusion
Generally speaking, cryptocurrency arbitrage provides opportunities for less experienced and versatile traders through the exchange of cryptocurrencies.
Although, just like traditional trading methods, cryptocurrency arbitrage also has certain risks, so if you want to make a profit, you need to be vigilant in every transaction.
Arbitration takes place in the stock market, bond market, and commodity market, where the same project is traded at different prices in different places. Because cryptocurrencies are digital currencies and lack underlying assets, they are more difficult to value and do not follow the same pricing rules for stocks and bonds based on the performance of companies, municipalities, or countries.
Arbitrage strategies may be more complicated than cryptocurrencies. However, this method is legal and can bring huge returns while also exposing investors to risks.
