What is Crypto Arbitrage?
London, UK– Crypto arbitrage is a term used to describe a strategy that benefits from fluctuating exchange rates. For instance, a trader can take advantage of small imbalances in the price of an asset listed on two exchanges to generate a profit. There are many reasons why some cryptos are more valuable on one exchange relative to another.
Let us say an investor buys an asset on a specific exchange for $50 and right away sells it on another exchange for $80, earning $30 as a profit. This trading strategy is crypto arbitrage.
Why Are Crypto Prices Different on Exchanges?
The inefficiency of the markets results in price differences in the assets. The variation in prices exists due to exchange fees, spread, trade volumes, and liquidity at any given time. The combination of such factors leads to changes in the crypto prices on the platform compared to other platforms.
The price of assets should be consistent because of their supply and demand, but that does not happen due to the market inefficiencies mentioned above.
And it is a fact that arbitrage trading would cease to exist if crypto-assets were of the same price at all cryptocurrency platforms.
How Does Arbitrage Trading Work?
Arbitrage trading works by analyzing and identifying the difference in a particular crypto asset price. Traders or bidders benefit from market irregularities in asset prices across various platforms, and analyze the bid and ask price on different exchanges to identify the arbitrage opportunities. When they succeed, they buy the coin (crypto asset) on the exchange where it is cheaper and instantly sell it on a different exchange with a higher price for profit. If repeated consistently, a small profit can result in significant gain with this strategy.
The transaction is confirmed within 15-20 minutes for major coins, and if the market price falls during this period, arbitrage loss may occur.
Can You Make Money With Crypto Arbitrage?
The answer to this question is Yes! however, the process is somewhat complex. Finding the opportunity where there is price fluctuation in crypto assets on different platforms can be difficult. You can make money by the profit gained from purchasing a crypto asset on the exchange that offers the lowest price and selling it on an exchange with a higher price of that particular asset. The consistency in this strategy can be profitable at a large scale in the long run.
Some factors cause a reduction in the profit, such as exchange fees, time to transfer, or a sudden fall in the market price during a transaction, even resulting in a loss.
Tips on How to Benefit From Crypto Arbitrage
Arbitrage trading is a risky strategy; Daniel Stone, a Crypto Analyst from Blue Royal Investments, has listed some tips for you to ensure a successful crypto arbitrage trade.
- Liquid trading asset: A liquid crypto asset like BTC or ETH should be selected; markets have sizeable order books to protect against slippage.
- Monitor prices on multiple exchanges: This tactic will allow you to identify price discrepancies on different exchanges. Using a crypto charting package will be beneficial for monitoring crypto prices.
- Consider the fees: All crypto exchanges have their fees for their services. Only focusing on the price change and ignoring the service fee might lead to arbitrage loss. Choosing a crypto exchange with zero service fees would be better to increase profit.
- Use verified and funded accounts for crypto trading: Such accounts limit the deposit and transaction fee while reducing transaction time.
Cryptocurrency Arbitrage Strategies
There are two most common methods to perform crypto arbitrage between exchanges:
- Spatial Arbitrage: Crypto arbitrage between two exchanges.
- Triangular Arbitrage: Crypto arbitrage between more than two exchanges.
This is a strategy when a trader uses geographical factors to buy crypto assets from an area at a lower price and sell them at a different place at a higher price. So it generally includes a transaction between two exchange platforms only. This strategy is commonly adopted among traders due to its simple form.
The triangular arbitrage strategy is the result of a discrepancy between three foreign currencies’ prices which takes place when the prices of exchange rates do not match up. The trader can profit from it when the difference in exchange prices is substantial. It becomes very difficult to manage trades and minimize fees, due to which it is not recommended for beginners.
Automate Crypto Arbitrage
Spatial and triangular arbitrage can be risky methods to be adopted across crypto exchanges. Applying arbitrage strategies can be difficult due to frequent price changes of crypto assets to adjust to the crypto market inefficiency. To overcome this problem, there are certain tools available that automate the process of arbitrage.
What Are Crypto Arbitrage Bots?
‘Crypto arbitrage trading bots’ are tools developed by software developers to find arbitrage opportunities. They are designed and programmed to meet certain trading requirements and run arbitrage opportunities automatically.
These bots can be created, downloaded, purchased, or implemented using different crypto trading different platforms.
How Do Cryptocurrency Arbitrage Bots Work?
Arbitrage bots are computer programs that work automatically to carry out buying and selling orders to a crypto exchange based on an already defined trading strategy or method. Application Programming Interface (API) links the crypto bot to the exchange, which helps in monitoring the market for opportunities and placing orders when specific programmed criteria are met.
Benefits of Arbitrage Bots
Arbitrage bots can offer the following benefits in arbitrage trading.
- Instant analysis: Arbitrage bots quickly analyze and interpret the market data, pricing, statistics, and potential risk factors.
- Trade multiple exchanges 24/7: A crypto arbitrage bot can work 24/7 to arbitrate opportunities across several exchanges without human intervention.
- Execute trades instantly: Faster than humans; arbitrage bots can capitalize on opportunities that exist only for seconds giving rise to ‘High-Frequency Trading.’
- Avoid loss: Trading bots can be programmed to make decisions based on pre-defined rules that allow them to manage trade risks by canceling right away if it encounters a situation where an arbitrage loss might occur.
Popular Cryptocurrency Arbitrage Bots
Listed below are those arbitrage bots that are trending in arbitrage trading.
Is Crypto Arbitrage Trading Legal?
Yes! Crypto arbitrage trading is legal in many countries. They believe that it is a beneficial strategy to promote market efficiency and price equalization. Arbitrage trading aids in balancing the price of crypto assets in multiple markets or platforms. So bidders are encouraged to take advantage of arbitrage opportunities.
Disclaimer: Our content is intended to be used for informational purposes only. It is very important to do your own research before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.