Crypto Arbitrage Guide — How to Make Money as a Beginner

Buy cryptocurrencies at a lower price and sell it a higher price

Gaurav Agrawal
Jun 24, 2020 · 9 min read

What is crypto arbitrage?

Cryptocurrency arbitrage is a type of trading that exploits differences in prices to make a profit. These price differences commonly referred to as “arbitrage spreads”, can be used to buy a cryptocurrency at a lower price and then sell it at a higher price.

Different types of crypto arbitrage

A common misconception with arbitrage is that you must buy crypto on one exchange, transfer it to another, then sell it.

Spatial arbitrage — Transferring between exchanges

Pros

  • Easy to execute

Cons

  • Transfers are slow and expensive
  • The spread might not exist anymore by the time the transfer is done

Spatial arbitrage — Without transferring between exchanges

This spatial arbitrage approach eliminates the step of transferring crypto between exchanges.

Pros

  • You can realize a profit immediately
  • No transfer times or fees

Cons

  • It can be difficult to submit two accompanying trades quickly at the same time
  • One order might fill while the other doesn’t mean that you won’t get the price you wanted, you can’t guarantee you’ll be fast enough to fill both orders first

Triangular arbitrage

This approach is different because it can be done entirely on one exchange. Instead of exploiting differences in prices between exchanges, triangular arbitrage takes advantage of differences between trade pairs.

Pros

  • It can be done on a single exchange
  • You can realize a profit immediately
  • No transfer times or fees

Cons

  • The more orders you’re submitting, the more chances there will be for other people to fill that order instead of you, meaning that you won’t get the price you wanted

How to find crypto arbitrage opportunities

For example, we’ll look at how to find spatial arbitrage opportunities. This involves looking for price differences between two exchanges where the spread is large enough that you can make a profit even after trading fees.

1. Fees

The spread must be large enough that you’ll make a profit after trading fees. If you’re paying 0.2% on your buy and 0.25% on your sell, you won’t make a profit if the price difference was only 0.1%. Therefore, you may want to only search for spreads above some threshold, say 1%.

2. Ask and bid rates

You want to be looking at the top of the order book on each exchange. When buying you’ll be filling the ask order on that exchange. Therefore, you look at the ask order’s rate and amount. When selling you’ll be filling the bid order on that exchange. Therefore, you look at the bid order’s rate and amount.

3. Avoiding slippage

Slippage occurs when you don’t get the price you expected. If the latest ask is for 0.1 BTC at a rate of $8,050 but you buy 0.15 BTC, you’ll get 0.1 at the rate of $8,050. And the other 0.5 BTC at a worse rate because you’ll be filling the next order in the order book. To avoid slippage your orders can’t be larger than the smallest of either the ask or bid orders that you’ll be filling.

4. Potential profit

If a spread of 30% exists but the ask order that you’ll be filling is only for $1 worth of the asset, your max profit won’t be more than $0.30.

How to submit arbitrage trades and take advantage of a spread

As stated above, for our example we’re doing spatial arbitrage without transferring between exchanges.

Steps to submit arbitrage Trade

  1. Move your USDT to Kraken
  2. Move your ETH to Bittrex
  3. Wait for a profitable spread to appear
  4. Find the smallest order amount to avoid slippage. For this example, if the bid order you’re filling is for 0.1 BTC and the ask order that you’ll be filling is for 0.05 BTC, the largest amount you can order is for 0.05 BTC.
  5. Now you have to place both orders at the same time on each exchange, one buy and one sell. For both orders, you’ll be using the amount you determined, 0.05 BTC in this example. You can open two limit orders and specify the exact price you want by using the ask and bid rate for that order you’re filling, or you can just open market orders.
  6. If you were able to place both orders quickly enough that you filled them before either was canceled or someone else filled them, you’ve just realized an immediate profit.
  7. Go back to step #3 and start again.

Good luck!

Arbitrage can be a great approach to day trading crypto, but it comes with its own set of benefits and downsides.

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Coinmonks

Coinmonks is a non-profit Crypto educational publication.

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

Gaurav Agrawal

Written by

Editor — Coinmonks publication (medium.com/coinmonks) and working on (https://coincodecap.com)

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com