A Beginner’s Guide to Crypto Arbitrage Trading
Let’s start with crypto arbitrage basics – what it is and how it works. Firstly, cryptocurrency arbitrage trading is not like other forms of digital currency investing that leave you open to losses from crypto market volatility. Instead, it generates profit from temporary price inefficiencies across exchanges.
Put simply, cryptocurrency arbitrage involves taking advantage of the fact that for a brief period, a coin can be available on different crypto exchanges, at different prices at the same time. To make a profit, you will buy the coin on the exchange where the price is lowest, then instantly sell it on the exchange where the price is highest and pocket the difference. The price disparity may only last for a very short time, so you need to be quick to exploit the opportunity before the market adjusts and the inefficiency is resolved.
There can be a number of reasons behind these differences in price, such as varying levels of activity and differences in supply and demand across exchanges.
Is Crypto Arbitrage Risky?
While crypto arbitrage is essentially very low risk, compared to speculative digital currency investing, there are a number of factors you need to consider to effectively protect your capital.
Firstly, you need to choose a cryptocurrency arbitrage app that doesn’t impose sky-high withdrawal fees and that allows for rapid transactions, since price inefficiencies are often short-lived. You don’t want other traders closing the gap before you can make a profit and so it may be advisable to store coins on exchanges, so you can respond quickly to arbitrage opportunities.
What Are the Different Types of Arbitrage for Cryptocurrencies?
There are multiple approaches to crypto arbitrage investing. We’ll start with crypto arbitrage in its simplest form. As we have seen, this involves exploiting small price differences between exchanges by buying the coin on one exchange and then selling it on another. Another approach is the simultaneous purchase and sale of two currency pairs, taking advantage of order book differences by executing transactions on both pairs at exactly the same time.
Volume volatility crypto arbitrage involves taking advantage of the fact that exchanges have differing trading levels of activity and an exchange with lower volume will have higher price volatility, which can be exploited. Additionally, there is margin arbitrage, where you buy the coin on one exchange and then go short on the exchange where you think the coin is being offered below market value.
Finally, there is the slightly more complex strategy, known as triangular arbitrage.
How Does Triangular Arbitrage Work?
This rather complicated approach involves buying and selling multiple base pairs on the same exchange for the same digital asset. This enables you exploit arbitrage opportunities on different crypto markets, while avoiding the problems that come with trying to monitor multiple exchanges at once.
The way it works is you use three different pairs, such as LTC/BTC, LTC/ETH, and ETH/BTC. Let’s start with buying LTC/BTC, which begins your arbitrage triangle. This will then be traded to LTC/ETH, which connects to the previous pair and the next asset in the triangular loop. You then trade to your third currency, ETH/BTC which connects to both the first and second pairs. This trade locks in your profit, which is generated by the rate differences across the three pairs. All you need to do now is to convert the third currency back into your original asset.
The advantage of this type of crypto arbitrage is that it enables you to avoid dealing with transaction times across exchanges. However, you must be careful that you are not losing too much, paying fees on every single step in the transaction and are earning more on your trade than you are paying to execute it.
Regulation and Crypto Arbitrage
Crypto arbitrage, like all forms of crypto trading, is subject to different regulation, depending on your global jurisdiction. You need to be aware of the current regulatory status of digital assets in your region, and local legislation with regard to trading, taxation and consumer protections. This is a relatively new emerging asset class and regulators all over the world are trying to keep pace with rapid developments in the crypto space, with varying degrees of success.
When using any exchange, trading platform or tool you must ensure that the service provider is trustworthy, since due to the anonymity and under-regulation of the crypto arena, caution is critical. The best way to do this is by only entrusting your funds or your data to a licensed and regulated company.
What Are the Best Tools for Exploiting Crypto Arbitrage Opportunities?
The best cryptocurrency arbitrage app tools will simplify and speed up your arbitrage efforts while being user-friendly and effective. Many of them are also completely free. For example, sites like CoinMarketCap, or CoinGecko will provide up-to-the-minute crypto market data, so you can identify price variations between different exchange listings and seize opportunities on all types of altcoins. Then of course, there are crypto arbitrage calculators as well as portfolio trackers like Blockfolio and CoinStats that let you monitor crypto pairs across exchanges and look for price differences.
The most important tool of all however is a crypto arbitrage algorithm. An automated, algorithmic trading platform is almost certainly the most reliable and rapid way to implement a crypto arbitrage strategy.
What Are the Advantages of Automated Crypto Arbitrage?
A crypto arbitrage algorithm is able to scan multiple exchanges simultaneously, monitoring hundreds of cryptocurrencies at once to identify inefficiencies and exploit them at lightning speed before the market corrects and the price difference resolves itself. When your crypto arbitrage is automated you can also execute a huge number of trades at the same time, with a speed and efficiency that no human can match.
The greatest benefits of automated crypto arbitrage are that it requires no specialized financial expertise, no time-consuming research into price differences, or trading activity in high and low volume exchanges and no hours spent in front of a screen executing trades.
Here at ArbiSmart, our EU licensed crypto arbitrage automated system does all the work for you. You just sign up, deposit funds and the system takes over from there, taking advantage of developing cryptocurrency arbitrage opportunities on your behalf, the second they arise.
Is Crypto Arbitrage Profitable?
Crypto arbitrage automated trading can be incredibly lucrative. For example, at ArbiSmart, profits start at 10.8% and reach as high as 45% a year, depending on the size of your deposit.
Another advantage of crypto arbitrage is its predictability. Unlike with speculative trading, it is consistent and reliable enabling you to plan and manage your finances effectively. Go to the ArbiSmart Accounts page and you will see, in advance, exactly how much you will be able to make monthly, and annually, based on the amount you invested. Also, whether the crypto markets are soaring or crashing you can continue to earn a steady profit, making crypto arbitrage a great hedging opportunity.
At ArbiSmart, you are benefiting from multiple revenue streams. These include your profits from crypto arbitrage trading, your compound interest on those earnings and capital gains from the rising value of RBIS, the ArbiSmart native token. RBIS has already more than tripled in value since it was introduced two years ago, and is set to shoot up even further by the end of 2021, since it is currently in the process of being listed on the exchanges and ArbiSmart is set to launch a number of new products and services by the end of the year, providing additional utilities for the token.
Crypto arbitrage is becoming increasingly popular, not only with retail investors, but with hedge funds, financial institutions and investment firms. It involves minimal effort, and offers high returns, providing the speed and profitability of crypto with close to zero risk.
Learn more about crypto arbitrage or expand your knowledge of a wide variety of blockchain and crypto-related topics by exploring the ArbiSmart blog.