Crypto arbitrage describes the simultaneous buying and selling of cryptocurrencies on different crypto platforms, taking advantage of price differences to earn some profits. Arbitrage trading is popular in markets where there are price differences among traders. You can also explore arbitrage trading crypto to grow your crypto portfolio. This article explains the concept of arbitrage trading and how you can get started trading cryptocurrencies successfully through the top arbitrage strategies.
What is cryptocurrency arbitrage?
Arbitrage trading is not a new concept in the financial market. For decades, traders in other financial markets, such as the stock market, have leveraged arbitrage trading to earn profits within a short time. Arbitrage crypto trading allows crypto traders to make profits and is potentially profitable due to the high volatility of cryptocurrencies. If you want to arbitrage bitcoin on crypto exchanges A and B, for example, here's what you'll do:
- Check the price of bitcoin on exchange A and exchange B.
- Monitor both exchanges' prices to confirm that they maintain significant differences for a long period.
- If exchange A has a lower price and exchange B has a higher price, you can buy bitcoin on A and sell bitcoin on B.
The price difference translates into profits. Crypto arbitrage is effective and profitable, but you need a fast internet connection to execute trades instantly.
There are two conditions for crypto arbitrage opportunities:
- First, there must be a significant price difference across the trading platforms. If the price difference is small or negligible, you may not make profits or even run a loss if trading fees apply. You buy the cryptocurrency on an exchange where the price is lower and sell the same asset on another exchange where the price is higher.
- Secondly, you must execute two trades simultaneously on different exchanges. As you buy or sell on one exchange, you must sell or buy on the other exchange.
You can use some strategies to maximize your crypto arbitrage trading.
The popular crypto arbitrage strategies are:
For example, you can do bitcoin arbitrage trading on decentralized crypto exchanges or automated money makers (AMM) where decentralized finance (DeFi) protocols such as smart contracts are deployed. Arbitrage smart contracts are coded to find price differences across exchanges and execute arbitrage trading.
You can also arbitrage trade crypto through computers (robots) and statistical methods. This method involves programming robots with statistical equations to find the best arbitrage opportunities and execute trades automatically with little or no input from the trader. You can use this method to save time.
Cross-exchange arbitrage is a popular method involving the simultaneous buying and selling of a cryptocurrency on two different exchanges, i.e. buy low and sell high. It is popular because most exchanges provide native arbitrage crypto tools that traders can use to improve their trading performance.
Spatial cryptocurrency arbitrage describes location-based arbitrage trading. For example, you can find that the price of bitcoin in one country differs from that in other countries. Therefore, you can trade by buying from a location with a lower price and selling at a location with a higher price.
Triangular arbitrage allows you to exploit the price difference between two assets, with a third asset acting as a pair. For example, you can trade BTC, ETH, and USDT, with USDT as the common pair. In essence, you trade one asset for another and then sell the asset for a third asset.
Is crypto arbitrage profitable?
Crypto exchange arbitrage trading is potentially profitable, but many factors impact profitability. There are factors that traders control and three others that traders have no control over. To become successful at crypto arbitrage, you need:
- A good understanding of cryptocurrencies and market factors
- Research skills, speed and coordination
- Stable and fast internet connection
Those are the factors that you control. Before you trade, look for these conditions:
- Volatility: the amount of profits you make depends on the volatility of crypto prices. Go for cryptocurrencies with enough volatility to give profits.
- Liquidity: look for coins with enough liquidity to execute trades instantly.
- Low trading commissions: crypto exchanges sometimes charge high trading fees and commissions, which may significantly impact your profits. You need to find cryptocurrencies with significant price differences to profit after the exchanges charge their fees and commissions.
Cryptocurrency arbitrage risks
If you are learning how to do arbitrage in cryptocurrency, you need to know that there are associated risks.
It is common to find crypto exchanges that charge fees and trading commissions. These fees and commissions can remove significant chunks from crypto arbitrage trading profits. Sometimes, trading fees may be so large that the total costs may wipe off your profits and funds. Depending on your exchanges, you might also have to pay fees on deposits, transfers, and withdrawal fees. This is a risk that you must be aware of before trading. Find exchanges with low trading fees and commissions.
Although time is an important factor in trading, arbitrage cryptocurrency trading is even more time-sensitive. The volatility of cryptocurrencies is so much that prices may change within a few seconds. When you discover an arbitrage opportunity, there's a possibility that thousands of other traders around the world are also on it. The more traders arbitrage that cryptocurrency, the faster the price difference disappears. Time and speed are crucial to making profits and risk management.
Traders looking for how to arbitrage cryptocurrency must be aware of the security risk of depositing funds on different crypto exchanges. There are dozens of crypto exchanges today, and you can never tell when malicious hackers may gain unauthorized access to any exchange. Because traders have to move funds between different exchanges, there's always a risk of losing funds to scams or personal errors. You should research any crypto platform you want to use and confirm that they offer high safety measures.
If you want a safer way to earn cryptocurrencies, you can earn through hosting crypto mining.