We provide an overview in this guide on what is investing in cryptoarbitrage and is it possible to make a profit from it.
We’re going through different arbitration strategies that are applicable to cryptos.
We also describe advantages and, more importantly, risks when dealing with crypto-arbitrage.
This means using the same cryptocurrency price differences on different exchanges.
When there are so many moves on the market, arbitration can best the best trading option.
What is Crypto Arbitrage?
Arbitration is the process of exploiting market inefficiencies.
This can occur in the case of cryptocurrencies as the asset price fluctuates over time.
If there is a disparity between an asset’s value across markets (or probably even within the same exchange), it may be possible to buy and sell the same asset in a way that will result in a net profit.
During the rest of this article, this system will be dissected in more detail.
We will explore how arbitration incentives can be measured, how to take advantage of these conditions, and even how to develop your own business arbitration trading system.
How Does Crypto Arbitrage Work?
Ultimately, it comes down to the size of trading.
On the larger exchanges where the levels of trade are high and a particular coin’s liquidity is fair – prices are usually lower.
On the other hand, the value will be lower in the markets where the particular coin has a limited supply.
Traders can make a profit from the price difference by purchasing from the former and selling on the latter.
Of course, the arbitration incentives can also go in the opposite direction, where you buy on a smaller exchange that does not immediately follow market prices and sell on larger exchanges that have already seen the value of the coin rise.
The well-known example of crypto arbitrage opportunity was a phenomenon known as the “kimchi premium,” which in January 2018, due to high demand in South Korea, saw Bitcoin (BTC) trading more than 50 percent higher than in other exchanges around the world.
Types of arbitrage
As the name implies, this is one of the most popular and easiest type of crypto arbitrage.
Simple arbitration involves taking advantage of the various prices quoted on two separate exchanges for cryptocurrency.
Although Exchange A could sell BTC for $8,400, the price of Exchange B could be set at $8,840.
Through purchasing on Exchange A and selling on Exchange B, a trader can take advantage of this $340 split — essentially transferring funds from one to the other.
You buy a particular cryptocurrency on one exchange at a low price, such as Bitcoin, and you sell the same cryptocurrency on another exchange for a higher price.
Simple arbitration buys and sells the same crypto-asset as quickly as possible on different exchanges to take advantage of the inefficiencies of exchange-wide pricing.
Triangular arbitration is a bit more complicated than arbitration.
You purchase three separate digital currencies instead of buying and selling a single cryptocurrency on different exchanges, taking advantage of discrepancies between certain trading pairs.
For example, if you first trade your Bitcoin in Ethereum on one exchange and your Ethereum in Litecoin on another exchange, you might find it beneficial to trade Litecoin in Bitcoin on a particular exchange.
Triangular arbitration is an occurrence that can happen on a single exchange (or several exchanges) where the price differences between three different cryptocurrencies contribute to an opportunity for arbitration.
In convergence arbitration, you buy currency at one exchange, instead of buying and selling a cryptocurrency, where it sells less than the market value.
At the second exchange where it sells less than the market value, you need to sell it. When the rates match, you gain.
If the spread increases past a predetermined trigger value, we try to do a trade.
The trigger value should be a certain amount, preferably derived from some kind of risk analysis that takes market volatility, trading costs, past trade attempts, etc. into account.
Most arbitration methods include both market shares of capital and buying and selling at the same time, respectively.
The reasoning here is that because it occurs almost instantly, it is a risk-free trade.
However, you can argue that this would not be risk-free in the case of cryptocurrency.
This is attributed to the instability of cryptocurrencies.
Holding them indefinitely while waiting for arbitration opportunities can cover a substantial margin for trading profits.
This is also refereed to as “cost hazard.”
We will therefore use more of the usual spatial arbitrage in detailing our approach here.
In addition, this involves sending the commodity from one market to another.
You can tailor it to your taste with the knowledge here to be one of the other forms of techniques.
How to Calculate Arbitration Costs and Profits
Benefits Of Cryptocurrency Arbitrage
Profits easily. It’s a reasonable way to increase your resources if all goes according to plan. It’s all about acceleration at the same time, so you can make money quicker than with normal trades.
A wide range of possibilities. There are more than 200 exchanges where cryptocurrencies can be bought and sold, which means plenty of lucrative arbitration opportunities.
Downsides To Crypto Arbitrage?
Regardless of the type of crypto-arbitrage that a trader embarks on, the sites they use will pay transaction fees— and withdrawal fees sometimes.
As a result, a variable in these costs is necessary for traders to ensure that a profit margin remains at the start.
Cross-border arbitration can also be made more difficult because of Know Your Customer (KYC) regulations — strict provisions that sometimes mean that a trader can only trade on an exchange if they provide valid government-issued identification or other documents to verify their identity.
Another question with exchanges is the uncertainties associated with conducting withdrawals.
If you have a short timeframe for receiving funds from one network to another, slow transfers can result in the opportunity being lost when a transaction is completed.
Best Crypto Arbitrage Platform
Most traders on cryptocurrency exchanges can and definitely do encourage a lot of information to process and research needed to find the right bid.
Luckily, you can be supported by qualified tools like Bitsgap Arbitrage Scanner.
It’s a good, secure method that solves the issues that surround arbitration perfectly, making it very easy to use this technique.
Bitsgap is an advanced and skilled tool, but it can be used intuitively.
You don’t need a lot of capital to use the tool as well.
Cryptos are highly volatile, providing a great trading platform for arbitrage.
The potential also comes with great dangers, however, due in particular to regular price fluctuations.
We would suggest to start learning to trade crypto first before going deeper into the investment in arbitrage.
Trading in arbitrage in the cryptocurrency is legal.
However, may exchanges can reserve the right to limit transactions and/or freeze user account deposits if they believe users use arbitrage techniques to manipulate trades to their benefit.