All You Ever Wanted to Know About Cryptocurrency Arbitrage

Arbismart
Arbismart
May 17 · 7 min read

Cryptocurrency arbitrage is all about using price fluctuations to make a profit. Buy low here, sell high there. Sounds pretty straightforward, doesn’t it?

But it’s not as easy as it looks. To show you why it isn’t as simple as it seems, here’s a simplified take on how to make money with digital coin arbitrage:

  1. Find opportunities (price differences between the markets)
  2. Make a decision:
  • Take fees into consideration: coin transaction, fiat transfer, network and wallet fees.
  • Understand the risks: market volatility, transaction and transfer time.
  • Consider the amount of taxes you need to pay.

3. Execute the trade

In order to successfully perform arbitrage between different markets, a person has to take many factors into account.

Terms To Know Before Getting Started

Arbitrage — by definition, arbitrage “is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.”

Fiat money“is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.”

Volatility “In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns.”

Deposit — the amount of fiat money you have deposited into the crypto exchange to buy cryptocurrencies.

Withdrawal — the amount of cryptocurrencies or fiat you have withdrawn to your bank, wallet, or another exchange.

Order book — is a ledger containing all outstanding orders for buying or selling cryptocurrencies.

What is Cryptocurrency Arbitrage?

The cryptocurrency trading is still in its infancy, and the markets are spread all over the world with different conditions, regulations, and interest in this innovative form of money. All of this leads to significant price differences of the same asset (coin) between exchanges. Cryptocurrency arbitrage is based on taking advantage of those price fluctuations — buying a particular coin for a lower price on one market and selling it immediately on another where the price is higher.

The concept of arbitrage is not something new. Arbitrage exists in stocks, bonds, and foreign exchange for years. Over time the opportunities for profitable arbitrage trading have reduced in the traditional markets, while cryptocurrency markets still offer fantastic opportunities for profit taking.

More prominent exchanges with higher liquidity drive the price trends, and smaller exchanges follow them. However, the prices take more time to correct on smaller exchanges, which is where the opportunity for arbitrage arises.

How Does Crypto Arbitrage Work?

In essence, it all comes down to trading volume. On the more prominent exchanges the trading volumes are high, and if the liquidity of a particular coin is reasonable — prices are typically lower. On the other hand, on the exchanges where the particular coin has a limited supply, its price is likely to be higher. By buying from the first and selling on the second, traders can make a profit from the difference in price.

Of course, the arbitrage opportunities can go in the opposite direction too, where traders buy on a smaller exchange that doesn’t follow the market prices immediately and sell on the bigger exchanges that have already seen an increase in the price of the particular coin.

Probably the best example of crypto arbitrage opportunity was a phenomenon known as the “kimchi premium”. Due to high demand in South Korea during January 2018, Bitcoin (BTC) was selling for a price 50 percent higher than on other exchanges in the world.

How To Do The Cryptocurrency Arbitrage

The school approach to arbitrage would be to monitor the markets for price differences, transfer funds, and place trades. Doing everything manually is possible, but in the world where everything is automated it is likely that you will miss profits.

There are companies like ours that has invested heavily in the development of the technology that can enable them to be more efficient and highly profitable. If you don’t have the time or experience to do the arbitrage by yourself, you can invest and have companies do it for you. Arbismart is one of the leading providers in this field, and the reason for that is we are fully licensed and completely legal. You can learn more about us on our website.

When it comes to arbitrage, there are several strategies you can use to make a profit:

Simple Arbitrage

Buying and selling the same asset on separate markets.

An example of simple arbitrage

Triangular Arbitrage

This strategy involves trading between three currencies. For example, buy BTC for USDT, sell BTC for EUR, and then exchange EUR back to USDT.

Convergence Arbitrage

This strategy is a bit more complicated, and it’s typically used by experienced traders. It involves buying a cryptocurrency on the trading market where it is undervalued and short-selling it on another market where it is overvalued. When the prices meet at a median price, the trader takes double profit.

The Upsides of Crypto Arbitrage

Cryptocurrency arbitrage can be a great tool for several reasons:

It’s a fast way to make a profit (if you know how)

Arbitrage deals can be completed within a couple of hours (if everything goes well), which is a lot faster than traditional trading, which frequently requires waiting for weeks to see a jump in price.

A wide selection of trading markets

According to CoinMarketCap, at the time of writing, there are over 250 crypto exchanges in the world, out of which approximately 150 have decent trading volumes. This creates a lot of potential for arbitrage.

The crypto market is still fairly unregulated, the information transfer between exchanges is slow, and there are fewer traders compared to the traditional markets. These are all key factors that lead to great arbitrage opportunities.

Digital coins are volatile

Although the volatility is often in the “downside” crypto list, when we talk about arbitrage, it’s a plus. The more prices vary, the better arbitrage opportunities pop up.

The Risks of Cryptocurrency Arbitrage

Digital currency arbitrage seems simple, so the question arises — why isn’t everybody doing it? Well, let’s just say that this is not a risk-free process.

KYC Requirements

Know Your Customer (KYC) requirements can present a problem, as each exchange can ban people from certain countries. Also, some exchanges ask for a bank account in the same country where the exchange is located to allow you to trade.

Security

To profit from arbitrage, you would need to keep coins on exchanges. This can be a risky business, considering how often the exchanges get hacked or even steal money from their customers.

Fees

Most beginners in this line of work tend to forget about exchange fees when calculating their profits. These fees and taxes and all other expenses need to be calculated in order to get the accurate numbers.

Large capital is Needed

Once you calculate all the expenses, profits from coin arbitrage may be small. To make profits worth your while, you would need to trade large volumes. So if you do not have enough capital and time to make it happen, investing in platforms such as ours brings you the full profits (which we make with pooled capital from our customers) and saves time.

Withdrawal Limits

And if you trade large volumes, you may reach the withdrawal limits on some exchanges, which would cause a delay. And each moment is precious as the prices change all the time.

Failing to Execute Promptly

Arbitrage requires perfect execution time. So if you are not 100 percent focused, you could miss it. Often the prices rise quickly, so it’s essential to do it on time.

Slow Transactions

Transactions of various coins can sometimes be slow, depending on the network. This can cause major troubles for arbitrage traders, as every minute counts.

Pieces of Advice for Crypto Arbitrage Newbies

Digital currencies are sometimes complicated and volatile, and when we add arbitrage on top of it — it may be too much to keep an eye on. Do your own research and make sure you are fully aware of the risks before trying to do it.

When doing it, keep in mind the following:

  • Look for new listings. They often provide the best arbitrage opportunities.
  • Do not use Bitcoin for transfers. It has become too slow for arbitrage. Instead, any other coin that is reliable and fast.
  • Make a plan. Know how much money are going to put in, which opportunities you plan to take and which to pass.
  • Use trusted exchanges. No need to explain this a lot, always check the ratings of the trading platform before transferring your funds.
  • Monitor the market, always. Especially when the market becomes extremely volatile — that’s the time when some amazing opportunities for arbitrage open.
  • Diversify. Keeping all of your money in one trade or on one exchange is too risky.
  • Never trade more than you can afford to lose. This is the most important rule that every trader knows. Remember it well.

Conclusion

We hope you found this guide useful. Cryptocurrency arbitrage can be a fantastic opportunity for profit, although it can be a bit too much to process, especially if you are a beginner.

So in case you decide to go with the professional help, let us know. You can use ArbiSmart Profit Calculator to see how much money would you earn with us. We are customer oriented, so don’t hesitate to reach out if you have any questions.

The same goes for this article and all arbitrage-related questions. We are here for you!

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