One of the distinguishing features of crypto trading is volatility. The cryptocurrency rates can change a lot in a short period of time; thus, crypto exchanges could have different rates for the same coins.
Traders can use this imperfection of the cryptomarket to their own advantage and start using the crypto arbitrage technique. We have tried to analyze crypto arbitrage, determine its popular types, and evaluate its risks and advantages.
Crypto Arbitrage: The Essentials
Crypto arbitrage is a crypto trading strategy that aims to capitalize upon various coin rates and exchanges. A trader attempts to take advantage of the different prices by buying assets from a particular exchange and selling it on another one right away. As you probably know, there are hundreds of crypto platforms out there, and all of them have different rates. That’s why the process of searching for lower and higher prices can make sense.
Why Is Crypto Arbitrage Possible?
Cryptocurrencies are extremely volatile. If you compare Binance and Coinbase, you can notice that the rates of assets can vary greatly. Why does it happen? For instance, you won’t find such a big difference in the fiat money exchange. There is an explanation.
Ordinary cryptocurrencies are not regulated by sovereign states or worldwide intergovernmental organizations, and they don’t have a universally accepted standard. Their prices are determined by the market demand and supply. Each coin is like a separate trading zone with a different level of liquidity in the order books. Therefore, any exchange can establish its own rates and prices. Cunning users found out about the lack of regulation and started actively using this loophole.
However, this strategy has nothing to do with crime. The process of capitalizing on market inefficiencies is entirely legal. Crypto arbitrage is central to the overall uniformity of the crypto market. Whenever there are price differentials across multiple exchanges, the trading activities of crypto arbitrageurs will eventually cause the prices of the digital asset across exchanges to converge.
The Types of Crypto Arbitrage
We get the main point of crypto arbitrage — to look for the lowest price or highest price and maximize the profit. But how do we put this into practice? There are some types of that strategy; we’ll emphasize the most popular ones.
The method is really simple. You can just buy coins at one exchange and sell them at another. The duration of withdrawal and speed of changing rates easily diminish all possible values. It doesn’t need any special knowledge, and it’s simple to do, but you need extraordinary luck to succeed.
Spatial Arbitrage without Transferring
If you are still fond of spatial arbitrage but you don’t want to lose time and money, there's a way to do it without transferring. In that case, you are supposed to have money on two exchanges and buy/sell simultaneously on both crypto platforms.
We are heading to more sophisticated arbitrage. Triangular arbitrage utilizes the price discrepancy of three or more assets. The trader might change the first currency to the second one, the second coin to the third, and then the third one to the first asset. The triangle cycle could bring you money if there is a good exchange rate. In addition, the transaction fee shouldn't be high; otherwise, the fee ruins your chance of fair profit.
Arbitrageurs follow the so-called decentralized exchanges (DEX’s), including PancakeSwap, MDEX, and Uniswap. The scheme is the same as in spatial arbitrage. You are looking for under- or overvalued assets and trying to get income.
The point of this method is to find a correlation between the dynamics of different coins. The price of altcoins can be going down while Bitcoin is going up and vice versa. But of course, there is not such an ordinary pattern nowadays. You need to do good research to see a new pattern of correlation. It takes time and requires an intricate understanding of the crypto world. An arbitrageur is supposed to use quantitative data models and bots to get profit from arbitrage at scale. Since the process is unmanned, a trader may carry out hundreds of trades in a matter of minutes to enhance their profitability capacity.
Benefits of Crypto Arbitrage
No doubt, crypto arbitrage has some benefits and risks, and we have to highlight them as well.
If you buy and sell the crypto asset simultaneously, you can avoid the risks found in long-term investments. When making long trades, the market conditions can significantly change. But when you buy/sell within a short period, you almost control the current market situation.
As we mentioned before, the volatility of cryptocurrency could be bliss for traders. Crypto arbitrage might be very useful, as the market rally takes place all the time. Crypto arbitrage reduces the risks of trading on a high volatility market.
Crypto arbitrage can indeed work. The popularity of that method is not entirely off-base. It is much more effective than many trading strategies if we would like to get an income as soon as possible. You can immediately profit from using the inconsistencies of time for a short period when the operations have finished.
Arbitrageurs have a chance of catching a good spread between currencies or platforms. Digital currency inconsistencies tend to range from 5% to 10%. There are occasions when opportunities have been as large as 40%.
The trader opens up multiple exchange websites and hopes to calculate price differences and check order sizes manually. Or you can utilize some kind of software tool to help in the process. The arbitrage spreads may only exist just for a second; that’s why you need a tool to assist with the process.
Risks of crypto arbitrage
Let’s move on to not-so-pleasant things.
First of all, you need to consider fees. The exchanges charge withdrawal and sometimes deposit fees. These fees can easily reach $20-30 per transaction. It doesn’t make you happy when you realize that a big part of your rewards will be lost because of fees. It’s important to read the conditions of the exchange you are going to trade with.
The regulation measures such as KYC (Know Your Customer) and AML (Anti-Money Laundering) can spoil the positive impact of cross-border arbitrage.
If you found a proper crypto mispricing, it can cover all your additional expenditures, including the transaction fee and other market costs.
Your strategy is able to fall apart because of this. Bugs, exchange issues, volume problems - these might come crashing down. The calculation might be right, but it doesn’t matter when the transaction just doesn't go through.
Contrary to popular belief, Bitcoin is not the best option to use arbitrage with. The operation at that market isn’t operated quickly. Approximately, we can see 6 transactions per second. It is enough time to get the rate changed. In this regard, it makes sense to take a look at the coins with high bandwidth and fast transaction capabilities.
Yes, we can add it to the risk factors too. The cryptomarkets fluctuate and adjust extremely fast. Any crypto arbitrage strategy can become irrelevant even faster. While you set up a new strategy, the market has already turned 180 degrees around twice.
The whole crypto market is a big unpredictable place, where anything could happen, including tremendous growth and fall.
To reduce the risk, some traders can deposit money into different wallets. On the contrary, it increases your security risk. Holding capital in many different wallets and accounts produces a larger chance of being hacked for at least one of them.
Special Arbitrage Algorithms: Bots and Software
Obviously, modern crypto trading is inconceivable without trading programs and algorithms. They could calculate all the possibilities and do the job quickly.
You can find many software solutions that provide algorithmic arbitrage. The specially tuned programs can scan multiple exchanges and provide the trader with arbitrage potentials.
There are two ways to automate crypto arbitrage: utilizing a premade bot online or writing your own software.
There are many bots on the internet - for instance, Dex Analysis. Each bot deals with different specialties and approaches. Be aware of scam projects. It might be a good point to check reviews of the bots before installment.
If you are good at programming, you might develop your personal bot. The development of a bot’s formula can be created relatively easily, with some capable of basing their actions on Excel spreadsheets and calculators.
Additional Arbitrage Platforms and Tools
Many companies offer additional services, such as scanners, live charts, Telegram bots, etc. And don’t forget about the wide range of mobile apps.
Traders should use the platform with low fees, as well as a wide variety of deposits and withdrawal methods. Such input data will help you to maximize your profit.
For instance, the platform Single Broker is a trading platform and brokerage service provider for crypto assets, but it could help to adjust the arbitrage strategy. It provides universal access to more than 15 exchanges and OTCs in real-time. You will be able to have multiple accounts and make fast and simple transfers between them.
The user can execute a convenient transfer of more than 20 crypto assets between various platforms and accounts from a single workplace in a couple of clicks. The most important thing is that it could save precious time for a trader.
The developers of Single Broker announced that they are going to add aggregate liquidity and unified API features soon. The first one helps to collect all available liquid assets. The second one aims to handle communication with many different APIs and backend data models.
Crypto arbitrage is a crypto trading strategy that comes with its own advantages and disadvantages. It is a legal opportunity for traders unlike any other.
You are supposed to choose the arbitrage method taking into account your own needs, plan, and funds. It’s necessary to read reviews and feedback, understand what is being offered, and maintain the security of funds to make sure that profits are not in danger. Keep in mind that without good knowledge and resources, multiple arbitrage techniques and opportunities cannot benefit you when there is a market inefficiency.