Crypto arbitrage is a new trading strategy among investors. They buy crypto from one exchange platform and sell it quickly on another exchange for a higher price. The Price of crypto varies from platform to platform. A cryptocurrency can be priced at a higher amount on a different platform, resulting in creating a loophole for investors to earn big sums.
So how does crypto arbitrage is exactly carried out?
Arbitrage is an investment that exists across the capital markets, in stocks, bonds, and commodities. Wherever the same asset trades for different prices in different places.
Since cryptocurrencies are completely digital and aren’t based on an underlying asset, it is harder to place a value upon and doesn’t have the same pricing conventions as equities and bonds, which are tied to the performance of a company, municipality, or nation.
Since cryptocurrency prices can vary from exchange to exchange, arbitrage opportunities abound, with more than 5,000 cryptocurrencies trading on more than 200 exchanges for people investing in cryptocurrency.
The crypto exchanges all work similarly, pricing crypto based on the last trade on that exchange. But it’s important to note that not all exchanges are created equal. Some of them have enormous trading volumes, while others aren’t as active. The trading volume on each affects the liquidity and the available prices on a given exchange.
Because there are so many cryptocurrency exchanges, an investor can spend a lot of time tracking crypto prices in real-time, to pinpoint opportunities for crypto arbitrage. There are a number of apps investors can download that will track the prices of Bitcoin and other cryptocurrencies for arbitrage opportunities.
How Can You Make Money With Cryptocurrency Arbitrage?
At first glance, cryptocurrency arbitrage seems like a simple matter of looking for gaps between the prices on one exchange and another and then executing a buy and a sell.
Famously, in 2017 there was a moment when the price of Bitcoin on Kraken was $17,212, but only $16,979 on Bitstamp—presenting an arbitrage opportunity. In that instance, an investor could potentially make $233 per Bitcoin by buying them on Bitstamp and then quickly selling them on Kraken.
While Bitcoin spreads aren’t always as wide as in the above example, there are times when other, less well-known forms of crypto could offer even wider gaps from exchange to exchange.
Taking advantage of those price discrepancies is what crypto arbitrage is all about. And it offers opportunities to make quick profits for traders who are willing to research the many forms of crypto as well as the exchanges they trade on, and then track the price fluctuations of those currencies in real-time to find the price discrepancies. But there’s more to crypto arbitrage than just exploiting the price spreads among different exchanges.
Some Risks Of Crypto Arbitrage
While there are hundreds of crypto exchanges and thousands of currencies out there, some know your customer (KYC) regulatory restrictions may limit the number available to you. Some exchanges may require proof of identity or even an open bank account in that country before approving an account.
While it is a simple process to wrap your head around and try to calculate potential profits, fees could limit the profitability of arbitrage opportunities. Calculations should consider deposit and withdrawal fees, both in fiat and cryptocurrencies, as well as trading charges implemented by the exchange.
While it is most profitable to store some assets on all your viable exchanges to reduce the overall time requirement, this can increase your security risk. Holding capital in many different wallets and accounts produces a larger risk of being hacked for at least one of them.
The relatively small profit percentages that are available with crypto arbitrage often mean that large amounts of capital are required for each opportunity to produce meaningful profits.
What are the Pros and Cons of crypto arbitrage?
- Low risk – Since all the buying and selling are done at the moment, there is less risk comparatively. No long-term commitment.
- Volatile markets are hit – Arbitrage trading is a good way to trade the volatile markets as the risk rate is low.
- Not dependent on bull or bear markets – Arbitrage can be beneficial regardless of the market. Be it bull or bear market, traders can make good money.
- Transaction fees – Traders have to pay a good amount of transaction money while using exchanges. While it may not be a big concern for a regular trader, it can hurt the arbitrage trader by minimizing the potential earning.
- Exchanges and cryptocurrencies are volatile – We all know how the market is up a minute ago and crashes the next hour. Not to speak of some transaction times and cost issues. An exchange is a platform that can shut down at any moment taking all your money.
- Technology – Use of the latest technology is a must as arbitrage needs to
- Minimum mispricing – Considering the costs, transaction fees, and the stability of the market, a crypto mispricing has to be high enough such that you are profitable after costs.
- Regulations – Regulations like KYC (Know Your Client) and AML (Anti-Money Laundering), can impact cross-border arbitrage.
- Experience – Obviously money attracts new traders in spite of the potential loss. But many people jump into the pool without doing the proper research.