Discover What is Crypto Arbitrage Trading and How Does It Work
Crypto arbitrage trading is a strategy that exploits the price differences between crypto exchanges or coin pairs to turn a profit. This trading strategy can be highly effective, allowing you to earn substantial capital while limiting your risk.
Have you noticed the constant price fluctuations of cryptocurrencies?
Arbitrage trading has existed in several markets such as stocks, options trading, forex, etc. And it has proven its efficiency and sustainability.
Let’s look at what it means to employ it in the crypto space because the truth is, this strategy can become very promising.
You can use different crypto arbitrage trading methods to take full advantage of the crypto market swings. Arbitrage corrects the inefficiencies of the market and, in so doing, better aligns all price levels.
Many people shy away from arbitrage trading or view it as a lousy investment glide because it can be very complex and requires a lot of experience or a good crypto trading algorithm to run it.
Arbitrage trading happens in every market every day, and it is always open for trading; however, we rarely make use of this opportunity.
A primary crypto arbitrage trading opportunity is always available when the price of an altcoin in one exchange is different from the same coin in another market.
For example, a coin may react to news causing the price to increase; at the same time, there may be options available on the altcoin which have not yet gone bullish.
Here, you as a trader use this opportunity to buy it where it is still cheap and sell it higher where it has been pumped.
This crypto arbitrage operation allows you to profit from the amount between the asking price and the buy price — almost risk-free.
It is important to note that the chance of getting on this kind of crypto arbitrage manually trading is very slim, which is why a lot of algorithm trading is developed or is a top priority project for several crypto bots providers like Gunbot.
How would you like to take advantage of constant cryptocurrency price fluctuations?
Crypto arbitrage is a tempting opportunity that allows you to profit from these price inconsistencies. Let’s find out how!
What is Crypto Arbitrage Trading?
Crypto arbitrage is the act of buying coins low on one market and selling them at a higher price on another. So you can resell them for a profit elsewhere or look for fluctuations in three or more coin pairs and then bank on the inconsistent prices of those pairs.
Essentially, crypto arbitrage trading is the process of buying and selling contrasting market inefficiencies to take advantage of price fluctuations.
The price difference on cryptocurrency exchanges is not as straightforward as in other financial markets. When it comes to the natural effect of decentralization and the slow development of crypto markets, crypto arbitrage opportunities are generally more common than in other financial marketplaces.
Is crypto arbitrage profitable?
Many people have debated the profitability of cryptocurrency arbitrage. The answer is, “it depends.” Crypto arbitrage trading can be profitable as long as price differences exist.
Whenever there is a price difference, someone will always take advantage of it and make money.
Is Cryptocurrency Arbitrage Trading Legal?
Yes, in most countries. Traders can participate in crypto arbitrage trading to ensure an asset is priced reasonably in different markets by buying it cheaply and selling it at a higher price in another.
Traders must take full advantage of arbitrage opportunities, as the act of balancing supply and demand for an asset can help keep the rates stable.
Let’s use this conventional example to understand this principle better:
Say an iPad or any other object in great demand. You may see these items on eBay sold for a much lower price than the suggested retail price.
Technically, if you have funds to invest, you can buy these items and sell them to other buyers at or slightly below the suggested retail price and still make a good profit.
Crypto arbitrage trading is all about taking advantage of the price actions in the crypto market. By taking advantage of these opportunities, constant profits are generated.
A manual approach of monitoring the markets for arbitrage takes too much time and isn’t practical for many reasons.
Still, in case you want to venture into this, you will have to obtain the most stable price of that particular coin because the opportunities will come and go at a very rapid rate.
Using a Crypto Arbitrage Calculator
To get the most out of crypto arbitrage trading is necessary to use a good calculator that will help you identify price opportunities quickly.
These calculators can easily do the computations needed to estimate the best price for two or more coin pairs. To get an idea of such opportunities in the market, you can check out CoinArbitrageBot; there, you can see crypto exchanges in real-time and find out about live arbitrage opportunities.
It is always advisable to first practice with a demo account before practicing live arbitrage trading. This way, you can learn to spot market price inefficiencies without risking your real money. Once you are sure you can trade for profit, you can start using your real money.
You can visit another crypto arbitrage calculator site here and see it scanning Binance for triangular arbitrage opportunities.
To master crypto arbitrage trading is essential to keep practicing until you refine and are ready and confident that you can always detect the right time to execute a trade and profit from it.
Remember: When you’re involved in Crypto Arbitrage Trading, you’re defying the “efficient market theory” which says that for markets to be efficient, there must be no arbitrage opportunity.
Why is crypto arbitrage possible?
Crypto arbitrage trading is still possible because different exchanges will have varying levels of liquidity for the same product.
The amount of liquidity on each crypto exchange for each asset will vary depending on the number of people buying or selling it. And variations in liquidity manifest as differences in prices from one exchange platform to another.
Another reason could be that cryptocurrency exchanges are not all the same. They use different software and, better or worse, trading engines. Besides each one target various investors or countries, these slight differences can affect the prices.
Also, One of the most important factors when judging a crypto exchange is how long it takes to withdraw and deposit funds. Longer processing times mean slower up-to-date changes in the market. Lower-volume crypto exchanges take longer to update rates.
So, for a successful arbitrage operation, the following conditions have to be present in the market:
- First, a price imbalance should exist.
- The same coin should’ve been traded at different prices in different exchanges.
- Altcoins with similar value should’ve been traded at different prices.
- The trade execution must be fast and accurate to limit risk.
Types of Crypto Arbitration
With the increasing utilization of arbitrage in crypto markets, there are many types of crypto arbitrage trading. When it comes to cryptocurrency, types of arbitrage trading are streamlined and quite different from the conventional types of arbitrage trading.
You understand now how cryptocurrency arbitrage works. But there are a few different types of arbitrage, all of which work a little differently.
This article will examine the two primary types of crypto arbitrage used by most bots and crypto traders: Intra-Exchange and Inter-Exchange arbitrage.
While you may read about many different arbitrage types with other names, like pure arbitrage, spatial arbitrage, deterministic arbitrage, triangular arbitrage, and so on. You should be clear that we mostly buy on one exchange and sell on another one or trade across more than one pair in crypto trading.
Crypto Triangular Arbitrage (Intra-Exchange)
Triangular arbitrage is based on the concept of “Relative Arbitrage,” and it is used basically to exploit price differences among three currency pairs.
The triangular arbitrage strategy exploits the price differences between three coins. The process is also called three-point arbitrage because of the different prices that can exist between three cryptocurrencies.
Price discrepancies can happen when one altcoin is undervalued in one market and overvalued in another.
The triangular crypto arbitrage trading strategy is a three-step process.
- First, it converts your primary coin into the secondary. Let’s say you buy Bitcoin with USD.
- Then, it converts the secondary altcoin into the third. Here you buy Ethereum with that Bitcoin you just bought.
- Finally, the third coin is flipped back into the first for a profit, say you sell the Ethereum you just bought for USD.
Suppose you end up with more USD than when you started your arbitrage operation has been a success.
Remember, this has to be done super-fast. That’s why we need arbitrage algorithms like bitRage to execute these transactions in a matter of seconds.
Is triangular arbitrage safe?
Crypto triangular arbitrage is a relatively safe trading strategy. It allows you to make a profit with little risk of losing money.
Crypto Spatial Arbitrage (Inter-Exchange)
Spatial arbitrage is the simplest form of arbitrage. It’s when an arbitrageur finds price differences between geographically separate markets.
In our world, spatial crypto arbitrage is a fancy way of saying, buy a coin cheap in one exchange and sell it for more in another.
Your job is to take advantage of the prices discrepancies between the two exchanges. For example, buy Bitcoin cheap on Beaxy and sell it more expensive on Coinbase.
Still, as easy as it may sound, the withdrawal costs, transfer times, and spreads make the process more difficult in this type of arbitrage.
How to perform Inter-Exchange Arbitrage operations without transferring crypto assets between exchanges?
With this approach to interexchange cryptocurrency arbitrage, you can take your time looking for a spread and act on it right away. You will be able to exploit the difference between exchanges without having to transfer your coins or wait for a slow transfer.
This faster exchange method makes it a better option for crypto arbitrage trading.
You can perform this arbitrage method by placing buy and sell orders on two exchanges simultaneously. For example, say you’ve seen some price differences on the Bitcoin market, and you can profit from it if you buy BTC at Beaxy to sell it on Coinbase.
Following the example, you would move your USDT to Beaxy and your BTC to Coinbase.
After that, wait for the price difference to appear. When you see it, you’ll buy Bitcoin with your USDT on Beaxy and sell it for USDT on Coinbase simultaneously.
So, if you had bought 1 BTC for 50k on Beaxy and you’d sold it at the same time on Coinbase for $50,200, you’d have made $200 on profit. Bear in mind that this is an example, and I do not include trading fees, but I hope you get the idea.
If you want to play more with this type of crypto arbitrage trading, you have to keep looking for price differences between two exchanges where the spread is big enough so you can profit after trading fees.
To take advantage of these opportunities manually, you would need to make an enormous effort and dedicate a considerable amount of time to it.
My recommendation is to wait a little bit more for bitRage interexchange to be ready.
In addition, it is also essential to stress that trading must take place simultaneously in two different markets. Remember that here we take advantage of the price differences. Prices can easily change at any time, so time is of the essence.
In the meantime, if you want to learn more about automated crypto arbitrage and try it for free, check out the Blackbird bot.
Crypto Arbitrage Trading Risks
Liquidity, price impact, and execution (associated with account size) are generally less risky through appropriate calculations. Algorithms help optimize arbitrage strategies through things like linear programming or any other form of bots.
Still, to make them fundamentally profitable (but not maximized), anyone with basic trading knowledge can handle these risks.
Let’s take a look at the types of risks associated with crypto arbitrage trading.
There are hidden costs associated with every transaction, and slippage is one of them. It is the cost of trading based on two coin pairs.
For example, if you place a buy order at a specific price but executed at a slightly higher price, there’s a slip. You paid a little more for your actions than you originally wanted.
For arbitrageurs, whenever you enter into a trade, you may be faced with the problem of buying at the bid price but selling at the bid price.
The sale price is the lowest available for your preferred coins. The offer price is the highest price you’re you’re willing to pay for your actions. The selling price is generally lower than the price of the order.
As your number of arbitrage trades increases, the amount of money you lose due to slippage increases.
There may be times when the exchange cannot fill your order immediately. Sometimes the platform you’re trading with may have difficulty executing your order for a variety of reasons.
In these cases, the price you expect can be very different from the price you receive.
Prices (Spreads) are a risk you take if you hold positions for a long time. They can anytime, but it is infrequent. They can occur when the opening price is higher or lower than the previous entry’s price.
Liquidity risk arises when you are interested in trading an asset but unable to because no one in the market wants to sell the coins within a relatively small price range between the bid and ask prices.
Therefore, liquidity risk directly affects your ability to trade.
Lack of liquidity can also contribute to slippage, the difference between the estimated trade costs and the amount paid.
Liquidity risk in this context is different from falling prices to zero, also known as principal risk. If the price of a coin drops to zero, the market says it has no value.
However, if you cannot find another party interested in trading the coin, it may just be a problem for you and potential market participants.
This is the reason why liquidity risk is generally felt in emerging markets or low-volume markets.
Liquidity is mainly associated with futures contracts and margin calls. Also, this risk tends to exacerbate other risks. If you have a position in an illiquid asset, your limited ability to liquidate that position in the short term will increase your market risk.
So you make use of an effective risk management plan.
Crypto Arbitrage Trading Advantages and Disadvantages
Crypto Arbitrage Pros
As stated above, with a good and effective trading plan, arbitrage trading is a wise way to profit from the market and increase your account size.
- Crypto arbitrage trading is fast and almost risk-free.
- Volatility — the crypto market is very volatile. Even though a currency might trend over the long term, the constant rise and fall of prices along the way can be advantageous to an experienced trader.
- Using the sharp increase and drop from a coin can result in price discrepancies and profitable arbitrage. Cryptocurrency price ranges tend to go from 3% to 5%, in most cases and 30-50% in rare cases.
- Opportunities abound. With over 500 exchanges and over 12k cryptocurrencies, there are plenty of opportunities to find arbitrage.
- Cryptocurrencies are so new that there are more opportunities for you to trade the different exchanges, and this is because there aren’t as many well-established networks. These differences can cause irregularities and disconnection between the crypto exchanges, which gives you more arbitrage possibilities.
Crypto Arbitrage Cons
- Compared to the traditional trading markets, this strategy requires a lot of trading experience, making it less congested. Not every arbitrage trader from other assets is willing to give crypto a chance, reducing competition in the crypto space. It makes the crypto space less competitive.
- This type of trading needs a fast response to market movements and is almost impossible to look through price history manually. This makes it technical for new traders with little trading knowledge and market experience; in this case, automated trading can be a better option for testing the strategies, making profits, and avoiding emotions.
- Another disadvantage associated with arbitrage is tax. Profits made from every operation are considered as part of your trading income. So you pay taxes on profits made from the marginal rate.
Make crypto arbitrage trading work for you.
Implementing crypto arbitrage in your trading strategy also opens you to many cryptocurrencies and several exchanges out there. These exchanges make arbitrage trading easy for you, opening you to an extensive range of opportunities.
As stated above, arbitrage trading involves a lot of knowledge about price fluctuations. The use of crypto arbitrage tactics can be tricky. You have to time your buys and sells perfectly to adjust for market inefficiencies.
Triangular or spatial arbitrage across exchanges can be nearly impossible because the prices fluctuate so quickly.
That’s why arbitrage trading tools, specifically designed to execute trades and satisfy the needs of traders, are available on the market. Software developers create these tools focusing on detail and the user experience, making them a suitable product for any trader to use.
Crypto arbitrage bots like bitRage are programmed to scan and analyze the markets for any possible arbitrage opportunity and execute the trades when the conditions are met on several exchanges simultaneously quickly than a person can.
Crypto arbitrage trading requires constant price track and solid price and fee calculations. If you entrust this work to cryptocurrency arbitrage bots, this low-risk moneymaking strategy could be perfect for you.
Sadly, bitRage is still in its beta testing phase, so I can not tell you to go for it yet, but you can get Gunbot now, and when bitRage gets ready with its stable release, all you have to do is upgrade your bot.
Arbitrage can be a legal and lucrative way to trade and make money. The only thing someone conducting crypto arbitrage trading is doing is exploiting price gaps between exchanges or coins. It is just like any other trading strategy!
You might have been thinking about how to get started with arbitrage trading. There are many ways to go about this, by investing in Bitcoin, opting for software, and so on.
Trading disparities involves unique risks. If you have a solid game plan and envision worst-case scenarios with various currency costs and risks, you can still be successful as a crypto arbitrage trader.
Regardless of the risk factor, always risk what you can afford. Don’t take chances with money you cannot afford to lose. Trade responsibly.
To take advantage of the rare crypto arbitrage opportunities, you’ll need to use specialized software like bitRage (when ready). This arbitrage trading software includes a way to identify the opportunities and execute trades within seconds very quickly.
Ready to take your cryptocurrency investments to the next level? Crypto arbitrage could be what you’re looking for. Automate your crypto trading with Gunbot’s multi-algorithm framework. If you’re serious about crypto trading — get Gunbot.
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