Guide to cryptocurrency arbitrage
Arbitrage is becoming a hot topic of discussion among cryptocurrency traders and investors.
2022 is seeing several free and paid arbitrage tools start to come online. Almost everyone seduces currency traders with promises of guaranteed profits when buying and selling digital assets. The only question is, how does arbitrage trading work?
Simple Arbitrage
As the name implies, this is the easiest form of currency arbitrage and one of the most common. You buy a particular currency, on one exchange at a low price and you sell the same currency for a higher price on a different exchange.
Why Arbitrage Might Be Lucrative
There are many reasons why you might want to try arbitrage, including:
- Quick profits. If everything goes according to plan, it’s a plausible way to increase your capital. At the same time, it’s all about speed so you might make money faster than with regular trades.
- Cryptocurrency markets are still young and volatile. Hence, most exchanges don’t share information and work on their own. Most cryptocurrencies experience many quick rises and sharp drops, which lead to price disparities and profitable arbitrage opportunities.
- There is less competition compared with traditional markets. Not every arbitrage trader is willing to give crypto a chance, which makes crypto space less competitive.
- Cryptocurrency price differences tend to range from 3% to 5%, and sometimes reach up to 30–50% (in extreme cases).
How to find arbitrage opportunities between exchanges
Then comparing small exchanges and large exchanges, most arbitrage opportunities can be found, because the difference in activity means that the price of small exchanges will not change from second to second.
For example, we will use Binance and Bityx exchanges:
Step 1 — we buy 1 BTC at a price of $16,812 USDT* on the Binance exchange
Step 2 — we transfer BTC to Bityx exchange
Step 3 — we sell 1 BTC at a price (Market order) of $17,892 USDT* on the Bityx exchange
Our profit is $1,079 After all these steps, we transfer our USDT* to the Binance exchange or any platform / walletInstead of the Binance or Bityx exchange, you can use any other pair of exchanges
*USDT is a stablecoin (stable-value cryptocurrency) that mirrors the price of the U.S. dollar, issued by a Hong Kong-based company Tether. The token’s peg to the USD is achieved via maintaining a sum of commercial paper, fiduciary deposits, cash, reserve repo notes, and treasury bills in reserves that is equal in USD value to the number of USDT in circulation.
