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 on another exchange immediately. This is arbitrage trade between exchanges, and the main goal is to take advantage of price differences.
The same can be and has been done on stock exchanges for a long time. However, the arbitrage opportunity is not good there since the bid-ask spread in conventional markets, and trading pairs is small compared to what you see in the order books of crypto markets like Ethereum (ETH) or EOS.
How does Cryptocurrency Arbitrage work?
Simple arbitrage strategy works by setting multiple accounts on one crypto exchange with a higher price and other crypto exchange with lower prices. Therefore, a crypto trader can capitalize on market inefficiency 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 manual calculation and trad execution, a crypto arbitrage trader can develop a crypto trading bot that places trades for you whenever exchange platforms offer different price quotes for the same asset. As the market develops and becomes more mature, creating an arbitrage bot becomes increasingly higher for the top cryptocurrencies. For example, Bitcoin arbitrage frequently does not yield enough potential reward to justify the trading and transaction fees. Therefore, important is to find a cryptocurrency exchange that allows for a simple statistical arbitrage for at least one crypto asset at a time by 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 fast buy and sell orders is relatively simple, a lot of traders and even hedge funds use arbitrage trading as a good way to increase investor holdings. This is also a great way for cryptocurrency exchanges to generate extra fees as arbitrage trading involves a lot of transactions in a short period of time.
Additionally, since there are crypto exchanges that have reasons for offering 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 have to take into account there is not much use for 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 around between exchanges.
Therefore, if you have a good understanding of the cryptocurrency market and crypto arbitrage trading – and some coins in your stash, It is a good way to make money due to price differences between multiple exchanges and different markets.
As long as buying and selling orders get executed as fast as possible, a sudden market move can ruin potential profit opportunities.
Is Cryptocurrency Arbitrage profitable?
Due to high volatility and trading volume, discrepancies across changes allow for a crypto arbitrageur to always find an opportunity. Therefore, cryptocurrency arbitrage is still profitable and offers a great way to increase your crypto holdings. Bitcoin arbitrage, however, increasingly becomes more 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 have a good edge on the market. While it requires more complex funding transfer mechanisms for fiat currency, the price difference from one crypto coin to another is still large enough to justify the effort.
Pros and cons of Cryptocurrency Arbitrage
The main benefits for crypto arbitrage are the opportunities to profit without much market risk as both a buy and sell order is executed at the same time. With the help of automation tools, traders are not even required to search for opportunities manually. 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 times of extreme network congestion, meaning that any arbitrage profit is reduced by the subsequent need to transfer the crypto to other exchanges or wallets.
How to calculate costs and profits of Crypto Arbitrage
Calculating costs and profits for arbitrage opportunity is relatively simple. You have to deduct the cost of asset dols from the asset purchased. For example, if you sell 1 BTC at $60,000 on one exchange while buying 1 BTC on another exchange for $59,500, your profit is the difference of $500. Additionally, you have to subtract any trading fee from this profit for both the bought and sold position. What remains is your profit.
What are the best Cryptocurrency Arbitrage tools?
Since the beginning of cryptocurrency trading, buying and selling coins on different exchanges to arbitrage trade has hastened 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 across multiple exchanges through a single app to take advantage of price differences across exchanges.
It is considered to be among the pioneers in cryptocurrency arbitrage and has a well-developed exchange API solution. It helps to set orders and execute trades while easily tracking your portfolio of coins and their prices.
Additionally, they offer Trading Bot and Signals services that can help you automate your trades by either placing market orders or limit orders directly to an exchange. As they state, their algorithm detects automatically what the best trade opportunities are across several exchanges. All you need to do is to connect the exchange accounts you have to the platform.
They also offer a free trial, which allows you to use their standard features with a $1,000 monthly trading limit. The pricing is divided into several levels with various tools and features unlocked as you move up the subscription plan.
Cryptohopper is another easy to use arbitrage tool that can help traders with different experience levels and crypto holdings try out automated crypto trading and easily track crypto prices.
They have an official partnership with several of the largest exchanges like HitBTC, OKEX, KuCoin, and offer affordable prices for their product. The first 20 trades or positions are free of charge and after those, the price tiers of their membership are mostly based on the trading volumes and the number of coins you wish to select. Top tier membership offers additional features such as Algorithm Intelligence, Market Making, and Arbitrage.
They also offer a wide variety of resources you could use to get familiar with their platform. Their “Get Started with Cryptohopper” is great for new traders that do not have prior experience with arbitrage tools. Further on, you can read their well-detailed documentation on how to use the platform more efficiently.
Additionally, their social trading platform allows you to share new strategies and their optimization in the internal chat. Several bot templates are offered for you to try, which is a great resource for those who are still new.
Overall, this platform is well suited for beginners.
Gimmer offers an automated crypto trading solution and a Discord group that helps to build a community of crypto traders. The platform works on Windows, OSX, Linux, and others, which is a great option for crypto traders that use several operating systems.
The basic features are similar to others. However, Gimmer offers free backtesting over a previous trading period as well as the creation of a free Trader Bot with one indicator and crypto pair. This is a great option to try out in both their offer and the paid version. The membership can be purchased by using Gimmer Tokens (GMR). This offers even more solutions and features such as an automated crypto lending bot, social trading network, portfolio of trading strategies, and a simulator, among others.
Additionally, they offer tutorials on how to use their crypto arbitrage tool to help you navigate through crypto arbitrage trading and fully take advantage of their platform.
Why does arbitrage opportunity exist?
The basics are simple – discrepancies between exchanges exist and always have. 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 purchased BTC and higher on the exchange you sold it, you can keep the difference as a profit. This profit is called arbitrage spread.
Furthermore, 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 a lower rate while selling on the exchange that offers a higher rate.
In cryptocurrency markets, this is specially profitable since several exchanges have sub-optimal prices. It can be explained by the fact that one exchange might have to comply with different regulations in various regions, while another exchange might not. Therefore, an additional cost and demand for, let`s say, BTC might be higher than normal.
What are the types of arbitrage opportunities?
There are several crypto arbitrage opportunity types – most popular being spatial arbitrage (with or without transferring between exchanges) as well as triangular arbitrage. Let`s look deeper into each of them.
Arbitrage with transferring between exchanges
This is the easiest way of arbitrage as it requires to purchase, for example, 1 BTC on one exchange, transfer it to another, and sell it for a higher price.
However, since moving BTC across different exchanges requires time and has additional transfer costs, the difference or spread will likely not be large enough to justify the risk of the sudden price move.
Arbitrage without transferring between exchanges
This arbitrage approach does not require transferring crypto between exchanges and allows you to act on the price spread instantly. All that is needed is to hold assets on two exchanges and make a buy and sell order at the same time when the price difference is high enough.
Spreads like these still do exist in cryptocurrency markets as trading fees become smaller; however, the price differences tend to decline. As more traders use cryptocurrency arbitrage and effectively compete against each other, market pricing for cryptocurrencies such as BTC increasingly comes closer to perfect.
Triangular arbitrage does involve more calculation; however, this is why many crypto arbitrage tools automate this for you. The basic principle is selecting three cryptocurrency pairs on a single exchange like ETH/BTC, XRP/BTC, and XRP/ETH. Then you trade ETH for BTC, BTC for XRP, and return to the starting point by trading XRP back to ETH.
There, however, has to be a substantial difference in pricing between all three pairs, which is not commonly seen on large exchanges and mostly seen during times of increased volatility. During these kinds of market conditions, your orders may not be executed at the price you have calculated. Therefore, caution is required as there are always additional trading and transfer fees and slippage across cryptocurrency exchanges.
Overall, there are several great crypto arbitrage tools that allow you to take advantage of price imperfections. They offer to place trades automatically without the need to switch between different exchange accounts in order to profit from existing arbitrage opportunities.
There is no single best crypto arbitrage tool; however, the listed ones above are great ways to speculate between two exchanges through a simple app.
Since cryptocurrency markets and the whole crypto space are relatively new, it is likely that crypto arbitrage will keep developing. This means that it is still worth taking a look at each of them and deciding which suits you best.