Cryptocurrency arbitrage is the simultaneous buying and selling digital currencies on different exchanges to profit from the price difference between the platforms. Cryptocurrency arbitrage is an extension of arbitrage in more traditional markets and environments. With arbitrage, the concept is almost risk-free because the trader is merely buying and selling digital assets simultaneously and there should be no market risk. In the cryptocurrency world, a surge in trading volume between trading platforms results in price differences for various tokens. Note, that leading exchanges are responsible for driving prices for the market. Arbitrage opportunities usually arise since smaller trading platforms do not instantly switch their prices based on the trend by large exchanges.
How Do Cryptocurrency Arbitrage Opportunities Arise?
As seen earlier, arbitrage opportunities are fueled by the difference in trading volume between two cryptocurrency exchanges. The difference arises when an exchange has a high trading volume with good liquidity of a specific coin. The end result is cheaper prices. On the other hand, we have a cryptocurrency exchange with a limited supply of a given digital currency. The price of this coin will be expensive. Traders profit by buying the coin from the former and selling it on the second exchange.
The second opportunity of cryptocurrency arbitrage arises when traders purchase coins on smaller trading platforms and sell them on larger exchange. Note that these exchanges are not connected in any way. When some trading platforms have a low trading volume the price listed doesn’t adjust to the exchange average immediately. Consequently, price differences do emerge between the two exchanges leading to arbitrage opportunities.
How to Conduct Crypto Arbitrage Trading
To be good at cryptocurrency arbitrage, you need to conduct manual monitoring of the market. Look at factors like price differences and proceed with the trade. After settling on a certain offer, estimate the fees you will incur. Look at the transaction, network and wallet fees. Additionally, keep your head up for risks that come with cryptocurrency arbitrage. Lastly, estimate the amount of taxes you will pay and proceed.
If you cannot do manual monitoring of the market, we have arbitrage bots online designed to make it as easy as possible to track price movements. Some of the bots are compatible with web browsers and mobile applications. Platforms such as Blockfolio can also simplify the market monitoring process. Another great tool that you can use for trading is Cryptohopper – you can check our Cryptohopper review for that.
Strategies to Profitable Arbitrage Trading
The end goal of arbitrage trading is to make a profit. As a result, we have various strategies to deploy that will for sure earn you some profit. We have the simple arbitrage strategy. This strategy involves buying and selling the same coin instantly on two separate exchanges. Another strategy is the triangular arbitrage. This approach entails taking advantage of the price differences between the three currencies. For example, buy BTC in USD, sell it to make EUR, and then exchange those EUR back to USD. Triangular arbitrage opportunities are also available within a cryptocurrency exchange. Lastly, we have convergence arbitrage. It involves purchasing a cryptocurrency on one market where it is undervalued and short selling it on an exchange where it enjoys a high value.
Advantages of Cryptocurrency Arbitrage
There are several reasons why you should give cryptocurrency arbitrage a chance. Here are some of the advantages associated with arbitrage.
The first plus is the potential profit. Depending on the type of exchange you select, arbitrage trading can take a matter of seconds. This is return earns you profit. Note that you have to research extensively before trading for profit.
You will also be exposed to a high range of exchanges. We have over 180 trading exchanges across the globe. Once you embark on arbitrage trading, you will explore more exchanges hence increasing your chances of earning profits in return. Additionally, you can get an exchange that suits your needs and make the switch.
Dangers Associated With Arbitrage Trading
Generally, cryptocurrency arbitrage is a good approach for short term profits. However, we have a number of barriers and risks along the way. You will have to overcome these factors for you to realize the full potential of arbitrage trading.
Storing cryptocurrencies in hot wallets. With arbitrage trading, you need to store coins in the exchange wallet to use them immediately an opportunity arises. However, exchange wallets are not the safest option out there. In the event a hack occurs, you will end up losing your money. It is good to be aware of this possibility before you start trading.
Processing delays. This barrier is familiar with forgotten coins. The transfer can last for days when the coin you are planning to sell is no longer profitable. You can use the cryptocurrency explorer to check the average confirmation time and how many confirmations are required by the exchange receiving your transfer.
Limited withdrawals. In the event you are planning to carry out large trades, limitations on withdrawals might stand in your way. Always be aware of the limit amount you can withdraw from your wallet on a daily basis.
Exchange fees. Most crypto exchanges charge fees on trades and deposit and or withdrawal fees. Factor in such charges so that your profitability at the end of the day is not affected.
Potential competition. Cryptocurrency arbitrage trading is gaining popularity and more traders are exploring the field. Therefore, we have the potential for increased competition, which might affect profitability.
Factors to Consider Before Arbitrage Trading
It no secret that cryptocurrencies are highly speculative, volatile and complex. Additionally, cryptocurrency investment come with risks. The same applies to arbitrage tradings. As such, you need to put a number of factors into consideration before you start trading. Here are some of the things to look out for;
Track new listings. Be on the lookout for new coins that get listed on exchanges. Monitor cryptocurrency news from trusted outlets. Note that if an asset has only been recently added to exchange there’s only limited demand for the coin on that site. You are likely to get a large price difference.
Avoid Bitcoin transfers. With cryptocurrency arbitrage trading, transfer of funds needs to be quick. Slowed transactions will have a negative effect on your profitability. Bitcoin has slow transactions hence you might end up losing. Consider faster cryptocurrencies like Ethereum.
Consider the credibility of the exchange. Dealing with cryptocurrency exchanges comes with its own risks. It is therefore important to carefully select the exchange you wish to work with. Conduct your research and focus on exchanges that have not suffered security breaches in recent times. Look at customer reviews to get a clear picture of the exchange position in the market.
There exist a number of opportunities when it comes to cryptocurrency trading. Clearly, arbitrage is standing out to be a future opportunity for many traders. To makes money with this approach, always ensure you have done your research and find a perfect arbitrage opportunity. You will then make the decision based on fees, taxes, and risks. It is also important to note that you require a number of arbitrage transactions to cover your deposit, withdrawal fees, and taxes. By taking into account all these ingredients: fees, risks, taxes, you can increase your profits in cryptocurrency arbitrage.
Subscribe to our Newsletter to be a part of our future $1,000 per month contests.