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Exchanges are where you buy and sell your cryptocurrencies. Though they are an integral part of the crypto markets, they tend to differ in a myriad of ways. From fees to trading pairs and payment methods to purchase limits, these exchanges often pose the fundamental trouble of significant price differences and lack of trading pairs. To deal with the imminent hassle, crypto ‘Arbitrage’ is a vital method to circumvent the potential hurdles while looking for reasonable prices to trade an asset.
Crypto arbitrage refers to the buying of a crypto asset and profiting from imbalances in pricing. As great as it may sound, it is however limited to imperfect markets where the prices are changing constantly. A trader can benefit from arbitrage by buying something for a low price and selling it for a higher price on a different crypto exchange. Arbitrage trading has been around since before crypto and it was used in stock exchanges for a fairly long time. However, the origin of quantitative systems designed to flag price differences and initiate trades across crypto markets has restrained retail traders from using arbitrage trading actively.
How to benefit from crypto arbitrage yourself?
- Pick a cryptocurrency of your choice
- Monitor its prices across crypto exchanges in real-time
- Create an account on both the exchanges with the highest and lowest price
- Buy your selected coin on the exchange with the lowest price
- Transfer the purchased coins to the other exchange’s wallet
- Sell your coin on the other exchange with the highest price.
- Withdraw the profit
Automated Arbitrage Bots
Traders can exploit price differences on crypto exchanges and highly benefit from this approach. However, for beginners, there are many automated tools or arbitrage bots that are designed to spot these price differences. Online trading apps such as Blockfolio, Coinigy and MutliTrader helps track real-time prices and allow seamless connectivity across cryptocurrency markets. Beginners can check these platforms based on global crypto arbitrage and initiate errorless trading orders for maximizing their profits.
These proprietary trading bots can predict the direction of major major cryptocurrency exchanges using automated algorithms. These bots help new users capitalize on trading speed, and price differences while mitigating risks with a higher degree.
Benefits of Crypto Arbitrage
A quick way to make profits
Simply spot the difference and trade
Numerous exchanges to chose from
There as high as 300 major exchanges throughout the world. The huge numbers give a great opportunity to spot the best price.
Crypto market’s lack of trading competition
With fewer traders as opposed to the other financial markets, it will be quite easy to get potential arbitrage opportunities due to the lack of a particular framework governing the crypto ecosystem.
Inherent volatility
Since cryptocurrencies are highly volatile in nature, the prices across exchanges will always differ depending upon the trade volume and orders.
Risks in Crypto Arbitrage
Exchange fee
The fee can range from 0.2% to 3% on certain exchanges. You will have to pay trade, deposit and withdrawal fee every time which can reach as high as 15% depending on the exchange’s location.
Transferring of cryptocurrency
Based on different geographies, exchanges can take up to 5 days to transfer your cryptocurrencies and considering the extreme volatility of crypto assets, your profits will turn negligible or might even increase manifolds. Depositing times and withdrawal limits are also a concern here.
Storing cryptocurrencies
You would need to store coins on a certain exchange which you want to withdraw from as it will relieve you of sending to the exchange’s wallet every time.
Movement time
Withdrawing and moving funds takes time and it can affect the potency of your profits earned through arbitrage given the volatility. Slower transactions can hamper your withdrawals and will affect your entire trade.
Points to consider before considering crypto arbitrage
Use a faster coin
Bitcoin transactions are much slower so you should resort to using coins like Ethereum whose throughput is much faster than bitcoin.
Use trusted exchanges
Using trusted exchanges will save you the trouble of fake volumes and prices which are a serious threat to any trader’s portfolio.
Market monitoring
Maintain good research practice to monitor any news or event that can pump or tank a coin’s value which you plan to exploit through arbitrage
Learn to hedge
To protect yourself from any adverse market movements, learn to hedge to prevent any significant losses.
So, is crypto arbitrage worth the effort?
The cryptocurrency industry is an emerging and developing market with numerous opportunities for Arbitrage. Many companies are considering to reap benefits from imbalances in liquidity and the volatility of cryptocurrencies. The increase in funds dedicated to crypto arbitrage indicates that it is perhaps the best strategy to capitalize on. Overall, crypto arbitrage can prove to be low-hanging fruit since the crypto markets are inundated with more complex aspects that a beginner would waste a lot of time understanding. One needs to understand the market risks, and find ways to circumvent the legal, financial and technical hurdles before foraying into crypto arbitrage.
