As a crypto trader, you are no stranger to the many crypto exchanges that are around for the buying and selling of cryptocurrencies. But did you know there is a modern form of market trading that is making money for crypto traders, including yourself? This form of market trading that includes all assets at your disposal to make investment decisions is known as crypto arbitrage. Crypto arbitrage trading has become one of the most popular ways to trade cryptocurrencies. It is, in fact, a modern form of market trading that you can use to earn money.
So here, what is crypto arbitrage trading? How can you make money with it? In this article, we’ll go through all and give you the steps to take to do your own crypto arbitrage.
What is arbitrage trading?
Crypto arbitrage is simply buying and selling cryptocurrencies at different exchanges. The difference in the buy and sell price on different exchanges are known as price gaps or arbitrage opportunities. When price gaps occur, it means that you can make an instant profit by buying something on one exchange and selling it for a higher price on another exchange. The purpose of this trading technique is to make an income from buying and selling cryptocurrencies, with minimal risk and effort.
Why the price is different on the crypto exchange?
Crypto arbitrage exists because of the differences in prices between different exchanges. If you look at coinmarketcap.com, you will see there are lots of exchanges that have different prices of the same crypto assets.
Cryptocurrency exchanges are aware of this phenomenon and have tried to put measures in place to ensure that they get the best prices themselves. However, if they don't monitor the prices of their competitors, it's possible for traders to exploit these differences and make a profit from crypto arbitrage trading.
Centralized exchange - Limit order feature on a centralized exchange makes huge gap price. On centralized exchange, price depends on the most recent matched price from the order book, and that price is considered the real-time price on the exchange. For example, if the market price is $39,128/BTC but the trader asks Bitcoin for $40,000 and it matched, then $40,000 becomes the real-time price of bitcoin.
Decentralized exchange - To keep the price in line decentralized exchange follow an automated market maker or smart contract system. Instead, order book DEX rely on liquidity pools. Every pool is funded by contributors and the price of both pairs is maintained by a mathematical formula. For example, if a trader wants to buy ETH from ETH/USDT pool, then he would have to add USDT to the pool to remove ETH. So to maintain the balance system automatically increase ETH price and decrease USDT price.
Types of crypto arbitrage trading.
There are several ways crypto arbitrageurs can profit off of market inefficiencies. Some of them are.
Statistical arbitrage: This trading involves statistical and high mathematical calculation and it only can be done by trading bots.
Cross exchange arbitrage: This one is the simplest arbitrage trading where traders buy on one exchange and sell it on another exchange.
Spatial arbitrage: Also called Geographical arbitrage, takes advantage of price differences between markets for the same asset due to supply and demand factors. This type of crypto arbitrage involves buying and selling assets from different exchanges based on price.
Triangular arbitrage: Here only one exchange involves but with more than two pairs to create a trading loop that ended with the same coin as a started coin. For example, BTC-USDT-ETH-BTC.
Decentralized arbitrage: In this arbitrage, traders can take advantage of a liquidity pool that may be under or overvalued.
Time Arbitrage: Time arbitrage takes advantage of the fact that prices in different markets are updated at different intervals. This allows you to buy an asset in a cheaper market and sell it quickly on a more expensive market before the price changes.
How Does Crypto Arbitrage Work?
Crypto arbitrage is a trading strategy that takes advantage of price differences. It involves the simultaneous purchase and sale of an asset to profit from the difference in price. In the case of cryptocurrency, this is done when the price difference is significant with regard to other exchanges.
To understand how crypto arbitrage works, let us consider the following example. A trader purchases 1 BTC from Exchange Kucoin at $30,000 and then sells it on Exchange Binance at $30,120. The trader makes $120 through this transaction as a profit. This process can be repeated over and over again until one gets tired or finds an opportunity to make more money through another strategy.
How to Find a Crypto Arbitrage.
Discover which exchanges have the highest price disparity of a particular digital currency (e.g., Bitcoin) using an online calculator such as Cryptocompare or Coinmarketcap. Once you have figured this out, it's best to determine which exchange has the lowest trading fees and has high liquidity (i.e., high volume). High volume indicates that you will be able to buy and sell crypto assets quickly without having to worry about affecting the market price.
Go to Coinmarketcap or Coingecko click on the coin you want to trade and then go to the market section. Here you can see all the current prices of exchange. You can change the filter from lowest to highest to find the best price. Make sure your selected pair is USDT because almost all exchanges support USDT pairs unless you use decentralized exchanges.
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| BTC prices on a different exchange |
How to start arbitrage trading.
Cryptocurrency arbitrage is a great way to make a passive income with almost no risk. However, for those looking to make money on crypto, crypto arbitrage trading is not so simple. It's possible that you could lose money if you don't know what you're doing.
You can do crypto arbitrage in two ways. That is.
By self - In this way, traders have to do all the work by themselves. To start, create an account at least two different exchanges and then buy any coin (ex-BTC) that has a cheap price than others. After that transfer, where have high demand and price and sell it. It's a free but time taking method than others.
By trading bots - Transaction speed and fast price volatility, making arbitrage trading hard but thanks to crypto bots. By using bots, traders don't have to do anything manually except connect to their exchange. When you execute the trade bots, find the best price to buy and sell on connect exchange without transferring any funds.
The only thing you may hate is the setting. All bots required some technical setup to run and also traders have to pay to access more bots features.
Advantage of arbitrage.
- It involves buying low and selling high–what could be better than that?
- You can make huge profits in a short time period–you don't need to wait long years for your investments to grow in value.
- There are limited risks involved–there is no risk of theft or financial frauds like hacking or Ponzi schemes.
- Need no crypto trading or market analysis experience.
- Best suitable for the volatile market.
Disadvantages of arbitrage.
Crypto arbitrage is a lucrative business for many investors. However, it does have some risks and disadvantages attached to it too.
- You have to create and manage multiple accounts that consume time and KYC is annoying as well.
- For arbitrage trading, you have to transfer crypto quickly in order to take advantage of the price. While performing this step, any mistake (especially putting address) can cause permanent loss of money.
- Low volume is another problem of crypto arbitrage, which means you will face problems executing a large amount of trade.
- Transaction cost is one of the huge barriers between exchanges, giving the best arbitrage. Your profit will be non if you would not focus on transaction costs.
- After the transaction cost buying fee, also play a major role in your arbitrage profit. Here the third party involves in buying crypto with fiat and they charge a huge percentage of a fee currently "Legendary trading" is considered the cheapest third party to buy crypto which charges 0.08%/ transaction but sadly it does not support every exchange.
- The slower transaction is another halt of crypto arbitrage trading, and you can do nothing about that. Bitcoin transactions take much longer to be processed when compared to Ethereum (ETH) transactions.
- It happens rarely. If your country has no proper rules and regulations about crypto then might have a chance to impose a money laundering case on you because you are transferring money overseas.
Things follow during Crypto Arbitrage Trading.
- Avoid the third party such as Master or Visa card, Wire that is charging a huge fee to buy crypto. Currently, legend trading is only charging a 0.08% fee.
- Do not trade with a small amount, otherwise, you won't get better results and aim to make 2 to 5 percentage profit according to the amount in one transaction.
- To reduce transaction fees, avoid ERC20 tokens or any coin that affects your profit. And also keep an eye on the maker and taker fees on the exchange.
- If possible, target new listing coins because of low demand the price could be lower than other exchanges.
- You have to log in several times so enable all features and make strong security to avoid any risk and hack threat.
- To avoid money loss enables limit loss features.
- Timing play important role in crypto arbitrage, so make sure all processes you do quickly.
Last word.
Trading different types of digital assets like bitcoin, Litecoin, and Ethereum can be a great way to make profits. The best part is that the potential risk involved is very little when compared to traditional forms of trading. This makes crypto arbitrage a great option for traders who have little to no experience in the world of cryptocurrency trading.
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