If you are just starting out in your crypto journey, you are likely to have come across the term ‘arbitrage’. Now, arbitrage has long existed in the traditional financial markets, even before the crypto market came into the picture. Yet, there appears to be more excitement surrounding the possibility of arbitrage opportunities in the crypto world.
In this article, we will look into the basics of arbitrage in the world of cryptocurrency and understand what crypto arbitrage opportunities are available out there.
What Is Crypto Arbitrage?
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Cryptocurrency arbitrage is basically a strategy, where an investor buys an asset/cryptocurrency on one exchange and at the same time sells it on a different exchange for a higher price. This type of trading strategy takes advantage of price differences.
The price of Bitcoin is $60,000 on Binance and $60,100 on Coinbase. You buy a Bitcoin on Binance and sell it on Coinbase to pocket the difference of $100. This is how the concept of arbitrage works.
Considering that the crypto market is known for being highly volatile, there arises the potential of crypto arbitrage opportunities. It must be noted that the price difference may last only for a short time; therefore, you have to be quick to use the opportunity before the market adjusts.
When compared with other forms of trading, cryptocurrency arbitrage is low risk. This is because the traders do not have to forecast the future prices. Additionally, these trades don’t take a long time to make a profit.
Arbitrage traders can expect a set profit by just recognizing crypto arbitrage opportunities and profiting on them without examining the market. They can also enter and exit arbitrage trades in seconds or minutes, on the basis of the resources available.
Types Of Crypto Arbitrage Strategies
There are different ways in which you can take advantage of arbitrage. Here’s how you can identify and make the most out of crypto arbitrage opportunities:
1) Spatial Arbitrage:
This is the basic form of arbitrage crypto trading. Here, a trader seeks to make profit by buying crypto on one exchange and selling it on another exchange for a higher price.
Before opting for this strategy, it must be noted that the spread typically exists for some seconds, whereas making the transfer could take longer. Additionally, transfer fees may be involved as you would be moving the crypto from one exchange to another.
2) Triangular Arbitrage:
As the name implies, triangular arbitrage refers to taking three separate assets and trading the difference among them, often on one exchange. When all of this happens on one exchange, transfer fees don’t become an issue.
Example: Let’s take three assets: BTC, ETH and LTC. Here, if you have BTC, you can sell it to buy ETH. You would then use the ETH to buy LTC. Finally, you sell the LTC to buy BTC. At the final stage, you basically convert the third cryptocurrency for the original asset. By following this strategy, the trader could end up with more Bitcoin at the end than what he or she started with.
3) Convergence Arbitrage:
This strategy is more complex in nature, and often used by experienced traders. Here, you buy a cryptocurrency at one exchange where it is selling below the market value. Then you sell the cryptocurrency on a second exchange where it is selling above the market value. The difference in price generates a profit.
While this arbitrage crypto strategy can be very lucrative, it is time-consuming as you need to deal with a number of exchange platforms.
Exchange X is a bigger exchange with high trading volumes. The price of BTC on Exchange X is $40,100. Exchange Y is smaller, and has a lower trading volume. The price of BTC on Exchange Y is $40,105. Due to certain incidents, the news is out that BTC is likely to witness more demand. As a result, Exchange X is expected to see an increase of buyers, thereby prompting an increase in the BTC price. Since Exchange Y is smaller, it could react slower to the market change. BTC now touches $48,490 on Exchange X, but only goes up to $48,290 on Exchange Y. This presents an arbitrage opportunity. So what you do here is buy BTC on Exchange Y, transfer it to Exchange X, and sell it for a higher price.
How To Best Utilize Crypto Arbitrage Opportunities
- When it comes to identifying and making the best use of crypto arbitrage opportunities, you must remember that you’re dealing with a highly volatile market. As a result, you need to speed up your arbitrage crypto trades before the window closes. It helps to stick with high liquidity exchanges that can quickly match and execute orders.
- Fees have a bearing on your profit. To make the most out of crypto arbitrage opportunities, you may want to find ways to cut as many fees as possible. One way is to deposit enough cryptos you want to trade on various exchanges. If and when crypto arbitrage opportunities come up, the holdings can be reshuffled to capitalize on it.
- Lastly, you may want to be cautious with illiquid tokens and coins. They tend to be popular as a result of huge differences in quotations on various exchanges. They may, however, lack market depth, preventing trades. This issue is unlikely when you are arbitraging with liquid pairs, like ETH, BTC, XRP, etc.
Is Crypto Arbitrage The Best Option For Me?
Arbitrage crypto trades can be very rewarding. There will always be various methods to generate profit as long as pricing discrepancies exist. But that doesn’t imply it will be simple or is the best option for you. Here are some things to think about before you go full throttle.
- To start with, you can never know when an exchange will freeze or shut down. That’s why it’s crucial to provide some room for error.
- Arbitrage, on the other hand, is less risky than many other forms of trade. You won’t always make a huge profit if you buy and sell cryptocurrencies on two exchanges at the same time, but then again you won’t lose much either.
- Crypto market is the right place for you if you aren’t looking to risk holding investments for the long term in the volatile space.
Tip For Beginners
You have the option of using bots to optimize cryptocurrency arbitrage trading. The bots are essentially computer programs which create and submit buy-sell orders to the cryptocurrency exchange.
The cryto trading bots facilitate trading on the basis of data and trends and when pre-programmed conditions are met. If you are just starting out with arbitrage crypto trading then it is highly recommended to use this tool in combination with market inefficiencies trackers
To understand how the bot works, consider this basic example. BTC is trading for $150 more per token on X exchange than it is on Y exchange. This will prompt the bot to quickly buy the Bitcoin on Y exchange and sell it on X exchange to make the profit.
Arbitrage strategies may seem complicated, but if you invest considerable time understanding the different types of strategies and the steps involved, you have the potential to reap benefits. However, only proceed after you are thorough with the risks in play. It is important to do your own research, especially about the lesser-known exchanges as well as the bots that can automate your trading.
Is there arbitrage opportunity in crypto?
Yes, not only is there arbitrage opportunity in crypto, it is profitable. There are many crypto assets traded across the world and numerous cryptocurrency exchanges. As a result of the price differences, there are plenty of crypto arbitrage opportunities. However, you must be cautious as crypto trading involves its fair share of risks.
How to perform crypto triangular arbitrage?
Triangular arbitrage strategy is aimed at generating profit from a price discrepancy among three different assets, typically on an exchange. For example, you begin with a balance in USD. You buy BTC with USD. After this, you buy LTC with the BTC. Finally, you sell LTC for USD.
Is crypto arbitrage risky?
The level of risk involved in crypto arbitrage trading is lower when compared with some of the other trading strategies. This is primarily because predictive analysis is often not a component. Such forms of trades generally tend to last only up to some minutes, therefore the exposure to trading risk is reduced to a large extent.