What is Crypto Arbitrage – Everything you Should Know
A price difference between two or several cryptocurrency exchange gives rise to crypto arbitrage opportunities. Arbitrage refers to the process of buying and selling some assets and this usually happens simultaneously. It involves trading and finding assets that are priced differently in different markets. Hence, arbitrage provides you the perfect opportunity of benefiting from a price difference between two or additional markets. You can simply buy the asset in one market and then sell it in another in order to benefit from the difference in price.
Why Consider Crypto Arbitrage?
The primary purpose of crypto arbitrage is to help in generating profits. If you run a search, you will come to know that there are hundreds of exchange platforms that exist and they have a large price distribution. This creates plenty of room for differences in price because of imbalances in demand and supply. Considering the fact that price discovery is done individually for every exchange, it means that large exchanges with high liquidity drive the price of an asset and small ones have to follow them.
Types of Crypto Arbitrage
There are two different types of crypto arbitrage, which are known as simple arbitrage and triangular arbitrage. They are quite common and also very similar. It is important to remember that both of these methods require low latency, high-speed networks and they both carry nearly zero-level risk.
How Does Crypto Arbitrage Work?
If you want to enjoy simple crypto arbitrage opportunities, you have to have accounts registered on two exchange platforms, such as Kraken and Binance. There is a common pair of assets on both exchanges. There is an order book for every exchange and the highest bid price is usually mentioned at the top of this order book. This refers to the highest price that a trader is willing to pay for buying a particular cryptocurrency. There is also the lowest ask price, which refers to the price that the trader is willing to sell their crypto.
However, the bid and ask prices being offered on one exchange or not equal to the bid and ask prices that can be found on the second exchange. As the crypto market is illiquid, this difference in bid and ask prices between two exchanges exists. Therefore, you will frequently come across different prices when you check out different exchanges. But, this inefficiency comes off as a blessing in disguise because it provides people with crypto arbitrage opportunities.
For instance, in the first exchange when you are purchasing a cryptocurrency at a market price, you will opt for the lowest ask price. But, when you sell the same cryptocurrency on the second exchange, you will sell it to someone who is ready to pay the highest bid price. In this scenario, the price of the crypto on the second exchange increases, while the price on the first one remains the same. The only thing that’s important is that the highest bid price on the second exchange should be higher than the lowest ask price found on the first exchange.
This difference in price between the two exchanges provides the opportunity to arbitrage a cryptocurrency. All you need to do is buy crypto on the first exchange where you pay the lowest ask price and then transfer it to the second exchange, where it is sold at the highest bid price. Your profit is the difference between the lowest ask price in the second exchange and the highest bid price in the first exchange. But, you do have to take the withdrawal and trading fee into account before you calculate your profits.
Crypto Triangular Arbitrage
Triangular arbitrage is a bit different from simple arbitrage, as three assets of two pairs are traded in this scenario. For instance, if you have bought One Bitcoin on a prominent exchange platform, it can be converted to a foreign currency through an exchange that serves the local market. The country’s currency is then converted to $$ for very reasonable profits. However, it should be noted that the opportunity of fiat triangular arbitrage is usually restricted to trade between exchanges that are targeting local markets.
When it comes to crypto triangular arbitrage, you can take advantage of the price difference that exists between 3 pairs of coins. This trade is only possible when the ratios between the coins boast different USD prices.
It is a fact that listing on large exchanges can boost the value of a coin and there are demand and supply imbalances that exist on small exchanges, which are perfect opportunities for crypto arbitrage. However, there are some cons of this practice as well, which you should definitely know. Crypto arbitrage involves transaction fees, taxes, transfer risks, execution risk because of volatility, and low liquidity. Plus, there can also be exchange issues due to KYC restrictions or withdrawal limit.
Things to Consider in Crypto Arbitrage
Even though your exposure is limited in crypto arbitrage, you can minimize the fees by carefully setting your trades and by choosing exchanges carefully. You need to pay attention to the crypto market in order to identify arbitrage opportunities. The success of crypto arbitrage can depend a great deal on transaction speeds. Whenever possible, it is a good idea to use faster coins like choosing ETH (Ether) as opposed to Bitcoin (BTC). In addition, you should always opt for trusted exchanges and use different exchanges for coins as this can give good results.
You should also bear in mind that arbitrage opportunities are very time-sensitive because they only exist for less than a minute. As these time restrictions exist, it can be immensely difficult for human traders to be able to take advantage of these opportunities and perform crypto arbitrage. Furthermore, you also have to consider the waiting time associated with approval of withdrawal requests, which often lead to a loss of arbitrage opportunity. In order to eliminate these problems, trading bots are often used for performing crypto arbitrage.
Crypto Arbitrage Bots
When you are trying to reap the benefits of crypto arbitrage opportunities, the emotional rush from keeping an eye on the crypto markets daily may not be the most productive or efficient way to trade. This is where crypto trading bots can be immensely handy, as they can assist traders in growing their profits, limiting losses, and minimizing risks across various exchanges. They also enable traders to earn passive income from automated trading. There are both free and paid robots that you can find for taking advantage of crypto arbitrage opportunities. These include Blackbird Bitcoin Arbitrage, ZenBot, Catalyst Engima, Hassbot, 3Commas, Cryptohopper, and Shrimpy.
Is Crypto Arbitrage Worth it?
Taking advantage of the price in crypto that exists between two different exchanges is certainly worth exploring, especially when you want some hands-on experience for buying and selling crypto. Moreover, you should never invest effort, money, and time in crypto without doing proper research. If your aim is to profit off the price difference that exists, then you will need plenty of experience in buying and selling cryptocurrencies because this will increase the potential of success in crypto arbitrage. Plus, you should also use trading robots because these can also boost your chances of walking away with profits via arbitrage.