Buying low and selling high seems pretty straightforward, in theory. In reality, this is not as easy as it looks. Especially if you still haven’t mastered technical analysis. With cryptocurrency trading in its infancy, and the market spread all over the world, there are some significant price differences between exchanges. Cryptocurrency arbitrage is based on taking advantage of those price differences – buying a certain coin for a lower price on one exchange and selling it immediately on another exchange where the price is high.
However, there are several risks you need to be aware of before starting with arbitrage.
What is Cryptocurrency Arbitrage?
Arbitrage is simultaneous buying and selling of an asset on different markets to make a profit from the price difference. Simply put, you would look for a coin which price is low on Exchange A, buy it, and then sell it for a higher price on Exchange B.
The concept of arbitrage is not something new. It exists in stock, bond and foreign exchange for years. Still, over time the opportunities for arbitrage trading have reduced in the traditional markets, while cryptocurrency still offers excellent opportunities for arbitrage.
Bigger exchanges with higher liquidity drive the price trends, and smaller exchanges follow these prices. However, smaller exchanges take more time to correct the price and follow the market, which is where the opportunity for arbitrage arises.
How Does Crypto Arbitrage Work?
Basically, it all comes down to trading volume. On the bigger exchanges where the trading volumes are high, and the liquidity of a particular coin is reasonable – prices are typically lower. On the other hand, in the markets where the specific coin has a limited supply, its price will be higher. By buying from the former and selling on the latter, traders can make a profit from the difference in price.
Naturally, the arbitrage opportunities can go in the opposite direction too, where you buy on a smaller exchange that does not follow the market prices immediately and sell on the bigger exchanges that have already seen an increase in the price of the coin.
The well-known example of crypto arbitrage opportunity was a phenomenon known as the “kimchi premium” which, due to high demand in South Korea during January 2018, saw Bitcoin (BTC) sell for more than 50 percent higher than on other exchanges over the world.
How To Do It
The basic approach to arbitrage would be to monitor the markets for price differences, place trades and transfer funds. Doing everything manually is possible, but there are tools such as our Bitrage which enables you to do it automatically.
There are several strategies you can use to make a profit with cryptocurrency arbitrage:
Buying and selling the same coin on separate exchanges (obviously).
This strategy involves taking advantage of the differences in price between three currencies. For example, buy BTC for USD, sell BTC for EUR, and then exchange EUR back to USD.
This strategy is a bit more complicated than the previous ones. It involves buying a coin on an exchange where it is undervalued and short-selling it on another exchange where it is overvalued. When the prices meet at a median price, you can take double profit.
The Potential Benefits of Crypto Arbitrage
Cryptocurrency arbitrage can be a great strategy for several reasons:
It’s a fast way to (potentially) make a profit.
Arbitrage deals can be completed within a few hours (if everything goes well), which is a lot faster than traditional trading which often requires waiting for weeks to see a price jump.
A large number of exchanges.
According to CoinMarketCap, at the time of writing (18 April 2019), there are 255 crypto exchanges in the world, out of which 150 have decent trading volumes. This creates a lot of potential for arbitrage.
Crypto industry is in its infancy.
Cryptocurrencies are still fairly unregulated, and information transfer between exchanges is slow. Naturally, there are fewer traders compared to the traditional markets. This is also good, as it’s another factor that leads to better arbitrage opportunities.
Digital coins are volatile.
The truth is – cryptocurrencies vary in price, a lot. Just check the graphs for the prices in the last six months. This sort of volatility makes arbitrage opportunities super profitable.
The Risks of Cryptocurrency Arbitrage
Cryptocurrency arbitrage seems like a piece of cake in theory, so the real question is – why isn’t everybody doing it? Well, there are a couple of obstacles you would need to overcome in order to trade successfully.
Know Your Customer (KYC) regulations can present a problem, as each exchange can ban people from certain countries. Also, you may need to hold a bank account in the same country where the exchange is based to be allowed to trade.
Storing coins on exchanges.
To profit from arbitrage, you would need to have coins on exchanges. This can be risky, considering that exchanges can get hacked or even steal money from their customers.
Most arbitrage beginners tend to forget about exchange fees when calculating their profits. These fees need to be calculated in order to be able to do it profitably.
Large trades are required.
Once you take into account the delays and fees, profits from coin arbitrage may be small. In order to make profits worth your while, you would need to trade large volumes.
And when you trade large volumes, you may hit the withdrawal limits on some exchanges, which would cause a delay. If you hit daily limit, you could be able to withdraw your coins in 24 hours from that moment.
Failing to execute in time.
Arbitrage requires perfect execution time. So if you are not 100 percent focused, you may miss it. Often the prices rally quickly, so it’s important to do it in a timely manner.
Transactions of different coins can sometimes be slow, depending on the network. This can cause troubles for arbitrage traders, to whom every minute counts.
Pieces of Advice for Crypto Arbitrage
Digital currencies are complicated and volatile, and when we add arbitrage on top of it – it can be too much to keep an eye on. Make sure you are fully aware of the risks before attempting to execute it, especially if you are a beginner.
When doing it, keep in mind the following advice:
- Look for new listings. They often offer the best arbitrage opportunities.
- Do not use BTC for transfers. Bitcoin has become too slow for arbitrage. Instead, use ETH or any other coin that is reliable and fast.
- Make a plan. Know how much money are you putting in, which opportunities you plan to take and which to pass. Will you keep coins on multiple exchanges or just on one? All these things matter.
- Use trusted exchanges. No need to explain this much, always check the ratings of the exchange before transferring your funds.
- Monitor the market, always. Especially when the market becomes extremely volatile – then there are some amazing opportunities for arbitrage.
- Diversify. Keeping all of your money on one exchange is risky. Consider spreading it around to minimize the risk.
- Never trade more than you can afford to lose. This is the most important rule of every trade ever. Remember it well.
We hope you enjoyed reading this guide. Cryptocurrency arbitrage can be an amazing opportunity for profit, although it can be a bit too much to process at once.
Fortunately, professional tools are here to help. Bitrage is a safe tool that solves many issues with arbitrage trading, making it much easier to execute. It’s a great tool that can be used intuitively and it doesn’t require a lot of starting capital. For all those interested, we have opened preorders – you can check them here.
Let us know if you have any questions regarding arbitrage trading, we are happy to help.