How to profit from crypto arbitrage trading
Arbitrage trading is a common strategy for day traders, regardless of which asset class they’re trading. If done right it can guarantee a quick profit, but tracking down the profitable spreads and acting on them quickly is key to success.
Note: This post will focus on inter-exchange arbitrage between two exchanges. If you’re interested in intra-exchange triangular arbitrage that occurs between trade pairs on one exchange, see our other post: Cryptocurrency Triangular Arbitrage: How Does It Work?
What is arbitrage?
If you’ve never participated in arbitrage trading before, it involves exploiting price differences across multiple markets or exchanges. For example, if the BAT-ETH market is trading for 0.0013085 ETH on Kraken and 0.00132424 ETH on Bittrex, that’s a price difference of about 1.2%. If you can quickly purchase BAT on Kraken then sell it on Bittrex you can turn a quick profit. Of course each exchange includes trading fees so you need to make sure you factor that in as well.
How to find crypto arbitrage opportunities
Finding spreads (differences in prices) across exchanges requires monitoring a number of exchanges simultaneously and doing the math to determine which is the biggest spread. Doing this manually can be a tedious and slow task, in reality this isn’t feasible. You’ll want a tool to assist in this process.
One great solution that can help with this is Coygo Terminal, a secure multi-exchange trading tool that makes many parts of the trading workflow easier. Coygo Terminal provides a number of real-time data tools that can be helpful while trading, but today we’re going to focus on the Arbitrage 2.0 screen.
As seen above, Coygo Terminal provides a real-time view of spreads across six different trade pairs and multiple exchanges. Every time an ask or bid is updated spreads are re-calculated, with the largest and most profitable spreads shown first in green while negative spreads that would incur a loss are shown in red.
Speed is a prerequisite for success
Whatever tool you use, speed is the most important factor to capitalizing on arbitrage opportunities. Profitable spreads won’t appear for long as many other trades, as well as automated trading bots, will be looking to make a profit as soon as the spread appears. As others submit trades to try and make a profit this will drive the prices on both exchanges to converge together and close the spread, so your goal is to find the spread and act on it first.
How to profit from inter-exchange crypto arbitrage opportunities
In order to profit from inter-exchange arbitrage trading you need to be able to monitor prices on multiple exchanges in real-time, quickly find the biggest spreads, and submit orders.
(P.S. In case you missed it, if you’re interested in intra-exchange triangular arbitrage that occurs between trade pairs on one exchange, see our other post: Cryptocurrency Triangular Arbitrage: How Does It Work?)
There are a number of different strategies that can be used to act on an arbitrage opportunity. I will be discussing two popular approaches but there are certainly other options as well.
Strategy 1: Buy, transfer, and sell
If you’ve decided that you’re seeing decent spreads on the BAT-ETH market between buying BAT on Kraken and selling it for ETH on Bittrex as in the example noted above, and you want to try to profit off of these spreads, you could simply purchase BAT on Kraken. With that done you can transfer it to your BAT wallet on Bittrex, then sell it for ETH. This can be successful but it’s a risky approach as profitable spreads sometimes only exist for a very short period of time, often under a second. Transferring cryptocurrencies between wallets takes time for the network to complete the necessary number of confirmations. By the time the deposit arrives on the second exchange, the price may no longer be higher than what you bought it for on the first exchange. Using cryptocurrencies with faster transfer times such as NANO or XLM can help mediate this issue, but it’s still not foolproof.
Coygo Terminal provides a Rapid Transfer interface to help facilitate this process, allowing you to quickly configure and submit transfers between wallets at different exchanges. Terminal will automatically fetch the deposit address for you so you don’t need to deal with manually copy/pasting wallet addresses, and the USD estimated value of the crypto to be sent will be displayed since it’s often easier to think of things in terms of USD. Below you will also see a list of pending and completed deposits and withdrawals so you can easily track the progress of the transfer.
Strategy 2: Hold balances on both exchanges and submit accompanying trades simultaneously
Another faster option doesn’t rely on waiting for transfer times, but it requires you to already hold both ETH and BAT. You would first get some balance of ETH on Kraken (which you will use to buy BAT), and also get a balance of BAT on Bittrex (which you will sell for ETH). With your exchange balances ready, the next step is simply to wait until the spread (price difference) is large enough between exchanges and start submitting buy orders on Kraken and accompanying sell orders on Bittrex.
This may sound complicated, so I will provide an example of how this works. In this example I will use the BTC-USDC market to make things easier. I will also use a fairly large theoretical spread to make the impact more obvious.
Starting state
Exchange A
- BTC-USDC rate: 7,050
- balances: 50,000 USDC
Exchange B
- BTC-USDC rate: 8,000
- balances: 5 BTC
Total portfolio
- 50,000 USDC
- 5 BTC
— — — — — — — — — — — — — — — — — — — —
Placing trades
Exchange A
- buy 4 BTC with 28,200 USDC (7,050 x 4)
- balances: 4 BTC, 21,800 USDC (50,000 starting — 28,200 traded)
Exchange B
- sell 4 BTC for 32,000 USDC (8,000 x 4)
- balances: 1 BTC (5 starting-4 traded), 32,000 USDC
Total portfolio
- 53,800 USDC (21,800 on Exchange A+ 32,000 on Exchange B)
- 5 BTC (4 on Exchange A + 1 on Exchange B)
— — — — — — — — — — — — — — — — — — — —
Ending state
Total portfolio
- 53,800 USDC
- 5 BTC
You started with 50,000 USDC and 5 BTC. You now have 53,800 USDC and 5 BTC. You’ve accumulated 3,800 more USDC without losing any BTC by exploiting the BTC-USDC arbitrage spread of 7,050 on Exchange A and 8,000 on Exchange B.
Coygo Terminal provides a great DIY solution for Strategy 2 with its One-Click Trading arbitrage interface, where you can easily find and react to arbitrage spreads in real-time by hand. If you’re holding balances on both exchanges. you can quickly configure accompanying buy and sell limit orders with the rate set to the current ask and bid prices and submit them to both exchanges at once. This is much faster than trying to submit accompanying orders on two exchanges using their web interface or mobile app, allowing you to act faster than others and gain an edge over the competition.
If you’re interested in a fully automated solution for Strategy 2, see info on our crypto arbitrage and trading bots: Crypto trading bots with Coygo Terminal — Simple, secure, and fast.
Configure and submit orders as fast as possible
As mentioned already, speed is your most important tool when trying to capitalize off of a profitable spread. Coygo Terminal has three options to help maximize profit without incurring slippage and submit orders as quickly as possible:
- Largest w/o slippage — Automatically sets both accompanying buy and sell orders to the largest order amount possible without incurring slippage.
- Limit to max available — Limits order sizes to what’s available in your wallets on either exchange.
- Set max amount — Allows you to set a maximum order size amount.
Avoiding slippage & finding which pairs to monitor
One last topic to touch upon is how to figure out which trade pairs you want to be monitoring. A market with a thin order book is likely to incur slippage, meaning you’ll be getting a worse average order cost if you’re placing a large order. You can help mitigate this by searching for markets w/high volume, or by assessing the order books on each exchange to make sure they’re fairly active.
Coygo Terminal will analyze the order book to notify you in real-time if either of your orders will incur slippage before submitting them, to help ensure you can fully capitalize on a profitable spread. See slippage detection toward the bottom of the GIF below: when no slippage will occur there is a green checkmark next to the order, when slippage will occur a red warning symbol will be shown to notify you that your order will incur slippage.
Filtering assets by volume, recent price changes, and more
Perhaps you might want to only be looking at markets of assets that have a high 24h volume. Or maybe you’re looking for particularly volatile assets on the 1 hour or 24 hour interval, as volatility might yield to larger temporary spreads. It’s up to you to choose your strategy here.This is one more area in which Coygo Terminal can help provide some insights and assist you in your selection. The Coygo Screener is available on the bottom of the Arbitrage 2.0 screen and allows for searching assets with a number of preset filters, such as “High 24h volume” or “Daily high volume losers”. You can also compose your own powerful custom filters by combining comparison across a number of data points, including 1h price change, 24h volume, market cap, and more.
Assessing a particular exchange’s order book for a trade pair
Taking a look at an exchange’s order book can provide a great indication of if you may incur slippage with larger orders and help you determine if you want to consider that exchange when attempting arbitrage.
If you want to assess an exchange’s order book, Coygo Terminal’s Trading screen can also provide some very helpful insights. Avoiding slippage is always a goal, and depth charts are a very common way to quickly visualize the book. Another tool unique to Coygo Terminal is the Order Book Superiority analysis, seen as the green and red horizontal bar above the candlestick chart in the demo below. This analyzes all open orders within 5% of the last price, and shows both the total amount locked up in open orders within that range as well as the ratio of asks vs bids. If the order book looks full of many orders, is being updated consistently, and Order Book Superiority shows a large amount of equity locked up in orders within 5% of the last price, you may be less likely to incur slippage as opposed to a market with less activity.
Remember your maker and taker fees
One important thing to note is that even if a spread is technically a positive percent and seemingly profitable, it may still incur a net loss depending on your trading fees. For example, if you incur a 1% maker fee and 1% taker fee, a small spread like 0.2% might not end up being profitable. Fees differ across exchanges and even across different users, since some exchanges offered tiered fees that change depending on your trading volume, so be sure to know exactly what fees you’re paying and take them into consideration when searching for spreads.
To make it easier to filter out smaller or insignificant spreads, Coygo Terminal allows you to set the minimum spread percentage and estimate USD profit to be considered a profitable spread, see the top of the Arbitrage 2.0 screen below.
Fully automated crypto arbitrage bots with Coygo Terminal
If you’re interested in running fully automated crypto trading & arbitrage bots see our other blog post, Crypto trading bots with Coygo Terminal — Simple, secure, and fast. You can create, configure and run cryptotcurrency bots that react to arbitrage spreads in 25 milliseconds or more. All bots can be run in test mode to simulate trading while testing new strategies
Wrapping up
Arbitrage can be a good strategy for day traders who aim to make a number of profitable trades in a day. A 1% or 2% profit doesn’t sound like a lot but if you can do it 20 times a day and with a decent starting balance, you can turn a good profit. Crypto arbitrage spreads have gotten smaller over the years as automated trading bots exploit them, but there are still profits to be made if a trader is willing to be diligent and uses the right tools.
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