It occurred to you that these differences open up excellent opportunities for arbitration. However, this may not be as obvious as it seems at first glance. Let's take a look at what crypto arbitrage is and how it actually works...
If you have been in the world of cryptocurrencies for some time, you have probably noticed the difference in prices between different crypto markets and exchanges. Even the most liquid digital asset bitcoin is traded at different prices in individual markets. Moreover, it occurred to you that these differences open up excellent opportunities for arbitration. However, this may not be as obvious as it seems at first glance.
Let's see what crypto arbitrage is and how it actually works.
What is Crypto Arbitrage
In many ways, cryptoarbitrager is similar to fiat or sports arbitration. The basic idea here is simple: you are trying to take advantage of the price difference for the same asset in different markets or exchanges.
If you need a definition, Investopedia describes arbitrage as "the simultaneous buying and selling of assets to take advantage of an imbalance in price. This is a trade that makes a profit by using spreads of identical or similar financial instruments in different markets or in different formats.”
In other words, buy cheap and sell expensive (eh)!
Cryptocurrency spreads can be significant on different exchanges. This gives traders a legitimate opportunity to profit from price discrepancies.
There are three different ways to conduct crypto arbitrage:
1). Ordinary arbitrage, which refers to the purchase and sale of the same digital assets on different exchanges with significant differences in prices.
2). Triple arbitrage, which involves the price difference between three currencies on the same exchange. She is trying to take advantage of the price difference with the help of numerous transfers. For example, you can buy Bitcoin in US dollars, sell Bitcoin in Ethereum and convert Ethereum back into US dollars.
3. Automated arbitration. Some companies specialize in providing tools for automatic arbitrage of cryptocurrencies. For example, one of the leaders in this niche is arbismart, which provides a quick way to deposit funds, choose a plan and take advantage of automatic arbitrage trading.
While all legitimate approaches can be profitable, it can be difficult to identify opportunities for three-way arbitration within an exchange. On the contrary, trading in large volumes on the same exchange can entitle you to attractive commission discounts that can have a positive impact on your income. Of course, the easiest way to implement crypto arbitrage is to use a third-party arbitration program, but then you will have to pay special attention to the service provider and the amount of the cost of its services.
For simplicity, below we will use examples related to ordinary arbitration.
Why Crypto Arbitrage Can Be Profitable
There are many reasons why you might want to try crypto arbitrage, including:
- Quick earnings. If everything goes according to plan, this is an affordable way to increase your capital. At the same time, it's all about speed, so you can earn money faster than on regular trades.
- A wide range of possibilities. There are more than 200 exchanges where you can buy and sell cryptocurrencies, which means a huge number of profitable arbitrage opportunities.
- Cryptocurrency markets are still young and volatile. Thus, most exchanges do not exchange information and operate independently. Most cryptocurrencies experience many rapid ups and sharp downs, which leads to price discrepancies and profitable arbitrage opportunities.
- There is less competition here compared to traditional markets. Not every budget trader is ready to give cryptocurrency a chance, which makes the crypto space less competitive.
- Spreads on cryptocurrencies, as a rule, range from 3% to 5%, sometimes up to 30-50% (in extreme cases).
It goes without saying that cryptocurrency arbitrage works best when you trade large amounts. Smaller amounts can lead to insignificant profits, which may not be worth your time. Indeed, cryptocurrency arbitrage can be a very profitable occupation, but only if you conduct your research, assessments and calculations.
How to calculate costs and profits from crypto arbitrage
Each case is slightly different, but usually you will need to consider the following fees:
- The fee of the manufacturer and the buyer when exchanging the purchase (exchange 1).
- Transaction fees (withdrawals) (1).
- Commission for making a deposit on the sale exchange (exchange 2) (if applicable).
- Manufacturer's fee and buyer's exchange sale (2).
- Final withdrawal or "withdrawal fee" (2).
In addition, there are several other variables that you may want to consider:
Market fluctuations. Some coins fluctuate more than others, and their prices may change faster than you expect.
Taxes and regulations in your jurisdiction. It's easy to forget that you have to pay taxes for your crypto transactions. Although the rules vary in different areas, you can estimate the amount of taxes you will need to pay for a transaction when calculating arbitration costs and potential profits.
Taxes on arbitration costs
Laws on cryptocurrencies by country. Source: cryptoresearch.Report
Example: Let's say you see an opportunity related to a cryptocurrency pair. For example, bitcoin trades at 3821 bits on Bitstamp, but sells for $4032 on Bitfinex. The price difference between the exchanges is $211. If you have enough money to buy 5 bitcoins, you can earn up to $1055. If you deposited your money to Bitstamp by CIBA transfer (it will take approx. 2 days) I incurred a 0% deposit fee (the cost of international posting is 0.05%). After that, you will pay approx. $47.7625 (let's round it up to $50) with a commission (0.25%) when buying 5 bitcoins. Fortunately, withdrawals to Bitstamp are also free.
It usually takes from 20 minutes to an hour for your bitcoin deposit to reach the Bitfinex wallet. Cryptocurrency deposits on Bitfinex are also free, so there are no additional fees here. Let's assume that during this hour the price of bitcoin on Bitfinex has fallen (in the worst case; it can also rise) by 5%, and now you can sell it for just $4,010. This leaves you with a potential profit of 943. Finally, let's say you pay an application fee of 0.2% (0.01 BTC) from Bitfinex for selling 5 BTC, which leaves you with $20,009. If you subtract all expenses and fees, the profit will be approximately $ 895.
Depending on your situation, you can decide to continue trading or withdraw funds, for which, depending on your choice, you will be charged an additional commission of 0.1% to 3%. Also, consider the tax implications for your trade.
In general, it is safe to assume that you will pay a commission of 3% to 15% of your capital; therefore, you should use only the most profitable opportunities.
How to choose exchanges for critpo arbitration
As soon as you decide to take advantage of crypto arbitrage, you need to evaluate and register on the most profitable crypto exchanges. Some exchanges, such as Bitfinex, require you to verify your account (which takes about 6-8 weeks) and make a minimum deposit of $10,000 to start trading. Others are less strict in their methods, however most of them will ask you to pass KYC/AML.
The most important variables when choosing an exchange for crypto arbitrage are:
Fees. High or low commissions for trading, deposit or withdrawal of funds can lead to unsuccessful transactions. Make a low-fee exchange as often as possible.
Geography. Some exchanges or some of their functions may be restricted in your region, so you need to know about them before making a trade.
Reputation. Check out the reviews and other people who talk about some exchanges before depositing your money. There are many suspicious and unregulated platforms in the industry, so it's better to be safe than sorry.
Transaction time. Some blockchains allow for fast transactions, while others can take up to an hour or more during peak hours.
Time of withdrawal of funds. Some exchanges withdraw funds manually, which happens only once a day or so, so be aware of the rules before you enter them.
Account verification. Some exchanges may not allow you to withdraw funds or fully use the markets until your account is confirmed, which may take several days or even several weeks at a time.
Market liquidity. Not every exchange has sufficient liquidity, especially if you want to buy or sell a large number of digital assets.
Wallet maintenance. Most arbitrage opportunities arise due to wallet maintenance on some exchanges, so be sure to be aware of whether you can withdraw or deposit crypto assets of your choice.
Check out our exchange reviews section when you're looking for the best deals. Once you set up your exchange accounts and prepare your money, it's time to get your first profit from crypto arbitrage.
Step-by-Step process of Crypto arbitrage
The step-by-step process of crypto arbitrage occurs as follows:
1. Discover the possibilities.
Many tools can help you find crypto-arbitrage opportunities.
For example, here on kryptonews, we offer a handy price tracker that can help you identify crypto arbitrage opportunities between some major exchanges and cryptocurrencies.
Tracking Kryptonews Arbitrage Prices
Other useful tools for finding arbitrage opportunities are:
- Coinjap
- Critpo Arbitration Applications
- Coinarbitrage.org
- Arbitration.Expert
- Tokenspread.com
Along with this, you can take advantage of arbitration automation programs (see the last paragraph).
2. Decide if this opportunity is worth it.
This is the critical moment that determines whether you will make a profit or not. It is necessary to carry out as much planning as possible before entering into a transaction. You need to consider:
Estimate the fees: transaction costs, transfer, network, deposit or wallet.
Pay attention to the risks: the time of withdrawal and transfer, market volatility, portfolio maintenance, rules or preconditions associated with exchange and withdrawal operations.
Weigh how much of your profits will go to taxes (if any).
A good strategy is to open, verify and top up your accounts (both in fiat currencies and cryptocurrencies) on several exchanges before you discover the possibility of arbitrage. This will help you save a lot of precious time when making transactions. Also, sometimes you may want to avoid bitcoin transfers between exchanges because the network is notoriously slow and relatively expensive, but that's only a problem when it's crowded.
Having determined whether exchanges and opportunities are suitable for fast and profitable trading, it's time to either implement them or look for another great opportunity.
Software for automation of arbitration
In addition to manual arbitrage trading, there are platforms offering software that will help you find opportunities and make trades automatically. They use bots and scripts that scan some exchanges 24/7 and can make a profit on their own. Of course, they also involve a fair amount of risk, so you should be careful not to gamble with money that you can't afford to lose.
One of the best automated crypto-arbitrage companies is the EU-regulated arbismart, which offers investors various plans starting from just 500 euros.
Many interesting companies working in this field are arbetau, hasonline software, Geico and Geimer.
We hope that this guide has taught you what crypto arbitrage is and how to do it. Keep in mind that trading cryptocurrencies is very risky and you should never risk money that you cannot afford to lose. After all, it is you who should take responsibility for your decisions and research.