What is crypto arbitrage?
The basics of crypto arbitrage are simple: You buy one crypto on an exchange that offers the lowest price while trying to sell immediately on another exchange. This is arbitrage trading between exchanges and the main objective is to take advantage of price differences.
The same can be and has been done in the stock markets for a long time. However, the arbitrage opportunity is not good there as the bid-ask spreads are in conventional markets and the trading in pairs is small compared to what you see on the order books of crypto markets like Ethereum (ETH) or EOS.
How does cryptocurrency arbitrage work?
The simple arbitrage strategy works by assigning multiple accounts to one crypto exchange with a higher price and another crypto exchange with lower prices. Therefore, a crypto trader can take advantage of market inefficiencies to make a profit without much market risk. This is a well-known trading strategy and works well as long as the transaction fee is not too high.
To make the strategy work without manually calculating and executing trades, a crypto arbitrage trader can develop a crypto trading bot that places trades for you when exchange platforms offer different price quotes for the same asset. As the market develops and becomes more mature, the creation of an arbitrage bot becomes more and more high for the top cryptocurrencies. For example, Bitcoin arbitrage often does not yield enough potential reward to justify trading and transaction fees. Therefore, it is important to find a cryptocurrency exchange that allows simple statistical arbitrage for at least one crypto asset at a time, either manually placing trades or using a crypto arbitrage bot.
Why is cryptocurrency arbitrage so popular?
Since the crypto market is still relatively new and transferring assets from one exchange to another as well as placing quick buy and sell orders is relatively simple, many traders and even hedge funds use arbitrage trading as a good way to increase investment holdings . This is also a great way for cryptocurrency exchanges to generate additional fees, as arbitrage trading involves many transactions in a short period of time.
Also, since there are crypto exchanges that have reasons to offer a lower or higher ask or bid price like the crypto exchanges in the United States, taking advantage of the price difference is relatively simple if you have the capital. However, you should take into account that there is not much benefit in moving capital around two exchanges unless you have, for example, 1 BTC to trade. This is because there are additional transfer fees associated with moving crypto between exchanges.
Therefore, if you have a good understanding of the cryptocurrency market and crypto arbitrage trading – and some coins in your stash, this is a good way to make money due to price differences between multiple exchanges and different markets.
While buy and sell orders are executed as quickly as possible, a sudden market move can ruin potential profit opportunities.
Is Cryptocurrency Arbitrage Profitable?
Due to high volatility and trading volume, discrepancies between changes allow the crypto arbitrageur to always find an opportunity. Therefore, cryptocurrency arbitrage is still profitable and offers a great way to grow your crypto holdings. However, Bitcoin arbitrage is becoming increasingly difficult as traders scan the market and create crypto bot systems that quickly minimize any potential profit opportunity.
Cross-border arbitrage is still a good way to get a good edge in the market. Although they need more complex mechanisms to transfer funding for fiat currency, the difference in price from one crypto coin to another is still large enough to justify the effort.
Pros and Cons of Cryptocurrency Arbitrage
The main advantages of crypto arbitrage are the profit opportunities without much market risk, since the buy and sell order is executed simultaneously. With the help of automation tools, marketers are not even required to manually search for opportunities. However, the downside can arise from sudden price spikes as well as increased transfer fees from one exchange to another. This has happened to Bitcoin arbitrage traders before during extreme network congestion, meaning any arbitrage profit is reduced by the subsequent need to transfer crypto to other exchanges or wallets.
How to Calculate Crypto Arbitrage Costs and Profits
Calculating the costs and profits of arbitrage opportunities is relatively simple. You must deduct the cost of the asset dummies from the asset purchased. For example, if you sell 1 BTC at $ 60,000 1 on one exchange, while you buy 59,500 BTC at another exchange for $ 500, your profit is the difference of $ XNUMX. In addition, from this profit you must subtract any trading fee for both the position bought and the position sold. What remains is your profit.
What are the best cryptocurrency arbitrage tools?
Since the beginning of cryptocurrency trading, the buying and selling of coins on various arbitrage trading exchanges has accelerated the development of various arbitrage trading and monitoring tools.
Let's take a look at some of the best that are currently available:
Launched in February 2018, Bitsgap is an example of a cross-exchange platform that provides automated trade placement through various exchanges. It allows you to control your assets on multiple exchanges through a single application to take advantage of price differences across exchanges.
It is considered to be among the pioneers in cryptocurrency arbitrage and has a well-developed API exchange solution. It helps to place orders and execute trades while easily tracking your portfolio of coins and their prices.
Additionally, they offer trading bots and signals services that can help you automate your trades by placing market orders or limit orders directly to the exchange. As they state, their algorithm automatically detects the best trading opportunities on multiple exchanges. All you have to do is link the exchange accounts you have to the platform.
They also offer a free trial that allows you to use their standard features with a monthly trading limit of $ 1,000. Pricing is tiered with different tools and features unlocked as you move up the subscription plan.
Cryptohopper is another easy-to-use arbitrage tool that can help traders with varying levels of experience and crypto holdings try out automated crypto trading and easily track crypto prices.
They have official partnership with several of the biggest exchanges like HitBTC, OKEX, KuCoin and offer affordable prices for their product. The first 20 trades or positions are free, and after that, their membership pricing levels are mostly based on trading volume and the number of coins you want to choose. The highest level membership offers additional features such as Algorithm Intelligence, Market Making and Arbitrage.
They also offer a wide variety of resources that you can use to familiarize yourself with their platform. Their Get Started with Cryptohopper is great for new traders with no previous experience with arbitrage tools. You can also read their well-detailed documentation on how to use the platform more efficiently.
In addition, their social trading platform allows you to share new strategies and their optimization in the internal chat. There are several bot templates available for you to try, which is a great resource for those who are still new.
Overall, this platform is very suitable for beginners.
Gimmer offers an automated crypto trading solution and a Discord group that helps build a community of crypto traders. The platform runs on Windows, OSX, Linux, and more, which is a great option for crypto traders who use multiple operating systems.
The main features are similar to the others. However, Gimmer offers free backtesting during a previous trading period, as well as the creation of a free trader bot with one indicator and a crypto pair. This is a great opportunity to try both their offer and the paid version. Membership can be purchased using Gimmer Tokens (GMR). This offers even more solutions and features like automated crypto lending bot, social trading network, portfolio of trading strategies and simulator among others.
They also offer tutorials on how to use their crypto arbitrage tool to help you navigate through crypto arbitrage trading and take full advantage of their platform.
Why does arbitration exist?
The basics are simple – mismatches between exchanges exist and have always existed. Therefore, by buying $ 10,000 worth of BTC and selling $ 10,000 worth of BTC on different exchanges, with the exchange rate being lower on the exchange you bought BTC and higher on the exchange you sold, you can keep the difference as profit. This gain is called arbitrage distribution.
Additionally, this can be done with advanced methods such as triangular arbitrage, which we will explain later. That being said, the basic principle is the same - you scan the order book and place a buy order on the exchange that offers the lower rate, while you sell on the exchange that offers the higher rate.
In cryptocurrency markets, this is particularly advantageous, as several exchanges have suboptimal pricing. This can be explained by the fact that one exchange may have to comply with different regulations in different regions, while another exchange may not. Therefore, additional costs and demand for, say, BTC may be higher than normal.
What are the types of arbitrage opportunities?
There are several types of crypto arbitrage opportunities – the most popular are spatial arbitrage (with or without transfer between exchanges), as well as triangular arbitration. Let's take a deeper look at each of them.
Transfer Arbitrage Between Exchanges
This is the easiest way to arbitrage, as it requires you to buy, for example, 1 BTC on one exchange, transfer it to another and sell it at a higher price.
However, since moving BTC between different exchanges takes time and has additional transfer costs, the difference or spread will likely not be large enough to justify the risk of the sudden price movement.
Arbitrage without transfer between exchanges
This arbitrage approach does not require crypto to be transferred between exchanges and allows you to act instantly on the price spread. All that is required is to hold the assets on two exchanges and place a buy and sell order at the same time when the price difference is high enough.
For example, you buy 1 BTC on Coinbase Pro for $ 10,000 1 and sell 10,100 BTC you already had on Binance for $ 10,000 10,100. The difference between the prices of XNUMX XNUMX and XNUMX XNUMX dollars is your profit.
Spreads like these still exist in cryptocurrency markets as trading fees become smaller; however, price differences tend to narrow. As more and more traders use cryptocurrency arbitrage and effectively compete with each other, market prices for cryptocurrencies like BTC are getting closer to perfect.
Triangular arbitrage involves more calculations; This is why many crypto arbitrage tools automate this for you. The basic principle is to choose three cryptocurrency pairs on one exchange such as ETH / BTC, XRP / BTC and XRP / ETH. You then trade ETH for BTC, BTC for XRP, and return to square one by trading XRP back to ETH.
However, there should be a significant difference in pricing between the three pairs, which is not often seen on the major exchanges and is mostly seen during times of increased volatility. During these types of market conditions, your orders may not be filled at the price you calculated. Therefore, caution is required as there are always additional trading and transfer fees and slippage on cryptocurrency exchanges.
Summary / Key establishments
Overall, there are some great crypto arbitrage tools that allow you to take advantage of price imperfections. They offer to execute trades automatically without the need to switch between different exchange accounts to take advantage of existing arbitrage opportunities.
There is no single best crypto arbitrage tool; however, the ones listed above are great ways to speculate between two exchanges through a simple app.
Since the cryptocurrency markets and the entire crypto space are relatively new, it is likely that crypto arbitrage will continue to evolve. That said, it's still worth checking out each one and deciding which one suits you best.