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Cryptocurrency Arbitrage

Cryptocurrency Arbitrage for Beginners: The Ultimate Guide

Cryptocurrency arbitrage for beginners? yeah, you don’t have to be super trader to earn crypto, you can start now as a beginner. We have explained everything you need to understand to start your trading from cryptocurrency arbitrage. Let’s start discussing now.

Money making is a risky process. For investors, ‘making money means investing in a company or fund that will generate a significant profit in the future. But you can make big bucks, too, with little magic tricks like – cryptocurrency arbitrage.

Arbitrage is a virtually risk-free process of buying a commodity at one end at a lower price and selling it at another end at a higher price. In simpler terms, this is the process of taking leverage of the inconsistencies of the market or exploiting its loopholes to gain much profit.

Don’t worry if you do not know anything about crypto arbitrage. This article will talk comprehensively about cryptocurrency arbitrage, its different flavors, opportunities in the cryptocurrency domain, and more. And before this article ends, I’m sure you’ll have practical knowledge and a reasonable understanding of how to arbitrage cryptocurrency.

Let’s get started.

What is Cryptocurrency Arbitrage?

Cryptocurrency arbitrage is a strategy that essentially takes advantage of cryptocurrency pairs’ price variation across different exchanges.

Cryptocurrency arbitrage is common and quite self-explanatory, and well-known among stock traders and crypto traders. The underlying arbitrage concept is the same, but only with the usage of cryptocurrency as an asset. The goal is to take advantage of the price difference and turn that into a profit.

Let’s assume the price of BTC on Coinbase is stated at $10,000, while at Binance, it is priced at $9,800. This price difference is the key to the leverage that is called crypto arbitrage. A trader can immediately sell his coins at Coinbase and place a buy order on Binance and get a profit of $200 almost instantly.

Check Cryptocurrency Guideline

What is the Process of Crypto Arbitrage Trading?

All crypto arbitrage trading consists of 3 simple executable steps. But, keep in mind that it’s easier to say these steps than execute them with perfection. Here they are:

  1. Identifying the disparity in the values across different exchanges or cryptocurrency pairs
  2. Timely purchasing the crypto asset at the reduced price
  3. Selling the purchased asset at a higher price on another exchange or currency pair

Example of Crypto Arbitrage

Here’s a scenario that’ll help you understand crypto arbitrage in general. Suppose, on one afternoon, David observes that AA Co. has listed itself on the New York Stock Exchange (NYSE) for $10. He quickly compares with the London Stock Exchange (LSE) and finds out that the prices haven’t levelled with the NYSE yet and is listed at $9.98.

He immediately buys 100,000 shares of AA Co. on the LSE and executes a sell order of his shares on the NYSE. This process is completely legal because David will own the shares of AA Co. only when it’s time to deliver on his transaction.

David makes a seamless transaction from NYSE to LSE, observing the small difference and enacted quickly to gain the leverage. On selling 100,000 shares, he gains $10-$9.98 = $0.02 per share and makes an instant $0.02×100,000 = $2000 from arbitrage trading. And this is the same way how it works in crypto.

How Does Crypto Arbitrage Occur?

Variation of liquidity of cryptocurrency pairs, varying withdrawal and deposit time across different currency exchanges, going supply and demand across the borders, rate of foreign currency, presence of different kinds of exchange, etc. – these are the primary reasons and also the variables responsible for the existence of crypto arbitrage in the global market.

These variations can be seen because of the difference in demand of the currency, i.e., the willingness of the people to pay for it and the pressure of the people purchasing the currency across different exchanges and crypto pairs. And sadly, it only lasts for a concise time before it becomes equivalent with the rest of the market. This is exactly why crypto traders precisely wait to exploit this periodic variation and leverage the temporary inconsistency for instant profit.

Crypto arbitrage is a financial state in the crypto trading market that doesn’t exist according to most finance textbooks. Then again, the reality is a lot different than theory, and that crypto traders have found a way to exploit the loopholes in the crypto market to gather perfectly times short term gains.

How Does It Work?

The crypto market is very volatile, and since there is no control of an entity over the price ups and downs, there is an ambiguity that keeps brewing in the minds of the people.

Cryptocurrency Arbitrage

What are the Different Types of Arbitrages?

1. Spatial Arbitrage

Spatial arbitrage is the process of buying crypto-assets from one exchange and selling it for profit at another business at a higher price. This isn’t a very convenient way of making a profit because of the exchanges’ spread factor, which may only last for a couple of seconds.

And every time you set up a trade, it goes into a queue that gets executed sequentially. So, by the time your turn comes up, you might be left out with more spread, leaving you with less than what you expected out of the trade.

2. Triangular Arbitrage

A triangular arbitrage strategy requires three currencies. Take Bitcoin (BTC), Zcash (ZEC), and Dogecoin (DOGE). The idea is to sell BTC to buy ZEC, then use the ZEC to buy DOGE, and then sell the DOGE to buy BTC. If there is truly any arbitrage in the market, you will be left out with more BTC than you started with.

This kind of trading can happen between single or multiple exchanges, which opens up the possibility of taking advantage of many other currency pairs. So, instead of taking advance over exchanges, a trader can profit from the differences between currency pairs.

Quick Tip: This is a difficult approach to execute manually but, the biggest upshot here is a way to make arbitrage profits from one exchange.

3. Statistical Arbitrage

Statistical arbitrage is the usage of quantitative data-driven models and the use of sophisticated bot service to predict accurate long-term and short-term trades. A statistical arbitration bot uses hundreds of mathematical models to predict the trade progression, and so, it might trade concurrently on hundreds of currencies.

Is Crypto Arbitrage Legal?

Crypto arbitrage is completely legal, and the traders are allowed to take advantage of any exploits they feel is worth taking the risk for. As we all know, the crypto market is volatile, unpredictable, and still in its early phase of development.

On a constructive note, crypto arbitrage trading is encouraged among traders to be done correctly and timely. With more traders getting involved in arbitrage, it is bound to help the market become more stabilized and keep the trade volume up and running across various trade pairs.

Are There Any Risks Involved in Crypto Arbitrage?

There’s a downfall to all sweet gains in the short term, which goes the same way for cryptocurrency arbitrage. The risks are quite significant, and to avoid them, any trader should know and address them to the best of capabilities. Here are some risks that everyone needs to know of:

1. Regulation

Crypto exchanges may impose some KYC regulatory restrictions on your trading, and they may limit the number of trades available. Some exchanges also require you to have a verified bank account before trading.

2. Fees

Pre-calculating the profit is a good thing, but it equally important to expect any uncertainties. And so, overthinking about a specific margin of profit limits your risk-taking ability.  Regardless of the outcome, your calculations should consist of a withdrawal fee, deposit fee, and the charges imposed by the exchange – both in fiat and cryptos.

3. Security

Storing digital assets on your exchange platform is a good way to get involved in a short and fast trade. But it also exposes you to the risk of getting robbed or hacked due to a security flaw that you’re unaware of.

4. Volume Requirement

Crypto arbitrage trading is usually done for a small percentage of profit. So, a sizeable amount of profit requires you to spend large amounts of capital, making it a very risky trade.

5. Timing

Crypto arbitrages only last for a few seconds before resolving the discrepancy across different exchanges and trade pairs. And to pan out such trades to your leverage, everything swinging variable has to connect to make a perfect trade.

In Conclusion

Arbitrage can be a great way to increase your crypto assets within the short term, which is a pleasing experience. But it comes with volatility and its big-time unpredictability, which being its two big caveats.

Do as much quantification of all your risk factors and make sample tests as well. From my personal standpoint and experience, a comprehensive understanding of the trading domain is always effective before you go on to commit any capital for arbitrage trading. Try following crypto trading mentors, trade analysis, different kinds of setup, and most importantly – find people with the same interest and mindset and passion that you have.