What is cryptocurrency arbitrage? Let’s take a look at the definition of arbitrage-an investment strategy that consists of buying and selling financial instruments, assets, or activities in order to profit from price differences between different markets.
There are many types of arbitrage from time to time, but the most common type that is investment is known as cryptocurrency arbitrage. In this article, we discuss what exactly it is, how it works, and what are the best practical ways to get involved and earn some passive income.
Origin of the word arbitrage
Arbitrage is a French word added to the English language and means taking advantage of price differences of identical financial instruments, in different markets or in derivative forms. So arbitrage is the exchange of one thing for another to take advantage of price differences.
What is Arbitrage and how to do it, many people talk about it without really knowing what it is. So let’s dive into this topic and find out everything there is to know about arbitrage in cryptocurrencies
In the cryptocurrency world, “arbitrage” is a term used to describe the process of simultaneously buying and selling an asset in order to profit from a difference in its price
In this context, cryptocurrency arbitrage can function as a way to make money by simultaneously buying low and then selling high on separate exchanges. Although crypto arbitrage is often associated with trading, it also includes other types of exchange transactions such as deposits and withdrawals.
How does it work and what is arbitrage?
Arbitrage is a trading strategy that takes advantage of an asset’s price difference in multiple markets for the same asset.
Arbitrage is based on a simple fact, that the same cryptocurrency should have the same value all over the world
So if there is a price difference, you should be able to make a profit by buying from an exchange at a lower price and selling on an exchange at a higher price.
How does arbitrage affect the value of cryptocurrencies?
In the course of making a profit, arbitrage traders increase the efficiency of financial markets
By buying and selling, price differences between identical assets are reduced
Lower-priced assets are bid up, while higher-priced assets are sold. In this way, arbitrage resolves inefficiencies in market prices and adds liquidity to the market.
In doing so, arbitrage pushes cryptocurrency prices toward their true value, which in turn means that the everyday investor will benefit from lower prices and higher returns.
Why are some cryptocurrencies more expensive on some exchanges than others?
Having understood what arbitrage is you may be wondering how it is possible for the same cryptocurrency to have different values on different exchanges.
Cryptocurrencies are decentralized digital currencies, which means they are not tied to any government or central bank, consequently there is no set price for bitcoin, its price is based purely on the activity of traders.
Neither are they pegged to any fiat currency, such as the dollar or euro, nor are they tied to any particular nation or exchange. Those looking to buy or sell any cryptocurrency will find that, supply and demand vary depending on the exchange used.
The price of a digital asset differs from one market to another because different exchanges charge different fees and each exchange has different trading volumes and liquidity, these differences create the opportunity to buy cryptocurrencies at one price and simultaneously sell them at a higher price.
is cryptocurrency arbitrage legal?
Precisely because arbitrage is a useful way to make a potential profit, it is fair to ask whether arbitrage is legal?
In most countries around the world, cryptocurrency arbitrage is perfectly legal as it contributes to efficiency and pricing for individual traders.
If arbitrage is so successful, why doesn’t every trader do it?
What are the disadvantages of cryptocurrency arbitrage?
- ❌It requires alot of work: With arbitrage, the bulk of the work is done before the trade. Finding price discrepancies can be difficult and there is no guarantee of finding one. In addition, arbitrage opportunities become harder to find.
- ❌Timing: Timing is important in cryptocurrency arbitrage because you have to execute trades quickly. The cryptocurrency market can change drastically from one second to the next, which is not ideal for this type of trading activity.
- ❌Commissions: arbitrage often offers small margins. Even small trading fees, withdrawal/deposit fees, or network fees can impact the profitability of arbitrage, even cause losses.
- ❌Limited liquidity: When deciding which cryptocurrency exchange to use, keep in mind that low volumes can make it difficult to execute a trade efficiently. If you want to move cryptocurrency X from Kucoin to gate.io, for example, and there is little interest in buying or selling cryptocurrency X on gate.io, you may end up with a cryptocurrency that you cannot sell
- ❌Starting Capital: To take advantage of these trading opportunities, you will need to have the capital available for a 0.02% gain to be satisfying.
- ❌Slow transactions: As trading volume increases, transactions take longer to process. This could be a big problem when trying to transfer funds quickly.
- ❌Disinformation: many beginners do not know what arbitrage is or about its existence, or do not have the right tools for it.
What are the benefits of cryptocurrency arbitrage?
- ✅Temporism: With crypto arbitrage, you can make gains in seconds. You do a lot of work to find an arbitrage opportunity, but once you find one, trading will only take seconds to complete. This is much more efficient than waiting and hoping for the price of an asset to move before you can trade.
- ✅ManyOpportunities: The cryptocurrency markets are still relatively new, so there is still plenty of opportunity for crypto arbitrage.
- ✅Lowrisk: Cryptocurrency arbitrage is a low-risk strategy, since trades are executed very quickly. This limits your exposure to price fluctuations.
- ✅Better efficiency: It helps create a fair and efficient market across exchanges when price imbalances are identified.
- ✅ArbitrageBots: software that creates and sends buy and sell orders to exchanges based on the rules of a predefined trading strategy limiting human error and increasing overall speed
Is there money to be made in cryptocurrency arbitrage?
Arbitrage is an established and well-known trading strategy that many people have used to make money. It is always profitable, but it requires skill and persistence.
Cryptocurrency arbitrages are small spread trading opportunities between two similar markets. You can earn $10 – $100 (0.2 – 2.5%) every day by taking advantage of the price difference between these two markets. If you focus on a dozen of these spreads each day, you can earn up to $1,000 per week.
However, it is mandatory to know what you are doing and be prepared if you want to be successful.
You can still make money by arbitraging. If you work fast and have the skills to spot opportunities, you can make decent money from arbitrage. However, it depends on how much money you plan to invest. Making 0.2-2% on €500 is nothing in front of 0.2-2% on 1 million.
Obviously the choice of exchange is essential given the low profit margins, an exchange with low fees is ideal such as Pionex that charges particularly low fees, only 0.05%, or other exchanges that offer very low fees.
But you need to be aware of the differences between exchanges, and you need access to different ones at the same time because cryptocurrency trading works 24 hours a day, 7 days a week, 365 days a year.
Types of crypto arbitrage
After getting an idea of what arbitrage is, we can understand what the most popular types of arbitrage are.
There are five common forms of crypto arbitrage:
Cross-exchange arbitrage: This is the basic form of arbitrage in which a trader tries to generate profit by buying on one exchange and selling on another.
Spatial arbitrage: This is a type of cross-exchange arbitrage trading that takes advantage of different regions. For example, a trader might look between exchanges in China and exchanges in Europe in hopes of finding price discrepancies. This strategy works well because different regions have different supply and demand rates for cryptocurrencies.
Triangular arbitrage: Similar to spatial arbitrage, but involves both buying and selling on a single exchange. This is often more difficult because exchange rates must be calculated between 3/4 different cryptocurrencies.
Decentralized arbitrage: this is basic arbitrage but applied to decentralized exchanges
This arbitrage opportunity is common to decentralized exchanges, which identify the price of cryptocurrency pairs with the help of automated, decentralized programs called smart contracts. If the prices of cryptocurrency pairs are significantly different from their spot prices on centralized exchanges, arbitrage traders can step in and perform Cross-exchange Arbitrage involving the decentralized and centralized exchanges.
Statistical Arbitrage: A more complicated strategy that uses mathematical models and trading bots. These bots execute automated trades en masse in order to maximize profit.
Arbitrage bots are not magic, here’s why you should still use them
What are the benefits of using arbitrage bots? Using bots to automate arbitrage trading in the cryptocurrency market can offer these benefits:
They remove trading stress: Constantly looking for arbitrage opportunities and placing orders on various markets and exchanges can be exhausting, a common reason why traders lose money in cryptocurrencies. A trading bot can be helpful in removing the excitement from trading by increasing profitability.
Instant market analysis: Cryptocurrency trading bots can instantly collect and automate the interpretation of market data, prices, technical indicators and statistics. Bots can be programmed to calculate the potential market risk of buying or selling cryptocurrency assets between different exchanges more efficiently than a human.
Execute transactions almost instantaneously: Bots work much faster than humans, making it possible to capitalize on opportunities that exist for only a few seconds. Traders tend to favor small, consistent profits made this way, since a succession of small profits can result in larger gains.
Automatic stop loss: Cryptocurrency trading bots are programmed to make a decision based on data, trends, and a set of predefined rules that can be implemented to manage risk. A bot will automatically cancel or exit a trade instantly if the criteria for an arbitrage opportunity are nullified, which can avoid potential losses.
Allow multiple trades worldwide 24/7: Cryptocurrency markets never close, with exchanges and trading platforms working continuously 24 hours a day, 7 days a week. A cryptocurrency arbitrage bot can identify opportunities to buy and sell cryptocurrencies on multiple exchanges simultaneously by taking advantage of every single minute.
Cross-exchange: It operates on multiple exchanges simultaneously.
Is crypto arbitrage without BOT possible and profitable?
YES, you can still perform cryptocurrency arbitrage transactions manually but bots will make it more convenient .
With a bot, cryptocurrency arbitrage can be much easier and simpler. But you have to consider the cost of a bot, the risk of using one, and the time it takes to supervise it.
So far, arbitrage trading in the cryptocurrency market has proven to be profitable and worthwhile. Professional traders can achieve a great success rate. However, it is important to note that these opportunities are becoming less frequent as exchanges become more efficient at identifying price differences over time and correcting them.
In the end, arbitrage trading may not be for everyone. There are multiple factors involved and it may prove to be a time-consuming form of trading. However, the risk/reward factor of this type of trading strategy is attractive to inexperienced users who are looking for quick gains within an unregulated market.
That said, moving forward in this type of transaction in the cryptocurrency market could prove profitable with the right tools, but also risky for the inexperienced.
The main appeal of arbitrage bots is their speed and accuracy. Beyond that, arbitrage bots can automate much of the difficult work involved in calculating and placing the right orders to capitalize on arbitrage opportunities. Beginners may have some apprehension about using a bot at first, but these are designed to allow even the less experienced to get started somewhere.