Cryptocurrency Arbitrage Opportunities: Do They Live Up to the Hype?
The world of crypto trading has taken off in recent years and the profit potential of the global digital currency markets has exploded. One specific type of cryptocurrency investment that has been generating a great deal of buzz is crypto arbitrage.
Before we take a closer look at cryptocurrency arbitrage opportunities and evaluate how safe, profitable, and accessible this type of trading really is let’s review the fundamentals.
What is crypto arbitrage and how does it work?
Crypto arbitrage involves generating returns by buying a digital currency at the lowest available price on one exchange and then profiting by selling it on another exchange at the highest price possible. In other words, crypto arbitrage takes advantage of digital currency market inefficiencies profiting from price difference across exchanges.
The number of exchanges is growing every day and each exchange is different, with its own unique advantages and drawbacks. They all offer different cryptocurrency pairs and set their own rates for the coins they list. Every exchange also handles a different volume of trades, a factor that can have a significant impact on the speed and efficiency with which you will be able to buy or sell your chosen digital currencies.
Since the crypto market is still finding its feet with regard to advanced trading functionality, there is room to exploit the fact that it is currently in a relatively early stage of its development and, unlike more established, traditional financial markets, is far from peak efficiency.
For example, on one exchange Ethereum might be listed at $250, but on another, at $270. If you purchase Ethereum on the first exchange at the lower price, transfer it to the second exchange where the price is higher and then sell it, all before the price changes, you could make a 7.4% profit. Keep in mind though that this does not take transfer fees into consideration. Clearly, to best exploit cryptocurrency arbitrage opportunities, the faster you can recognize price differences between exchanges and seize on them the greater your revenue potential.
The simplest form of crypto arbitrage trading involves a single digital currency being bought on one exchange and then sold on another, with no further trades required other than those involved in swapping the two assets in the currency pair. However, a slightly more complex crypto arbitrage strategy is triangular arbitrage, which involves leveraging price discrepancies among three different cryptocurrencies, on one exchange or across multiple exchanges. Triangular arbitrage opens the door to a wide array of crypto market opportunities. Here’s how it works:
Firstly, the trader selects a specific currency (A) into which they will convert their funds once the arbitrage triangle is completed. Now the first trade is made whereby currency A is traded into a new digital currency (B). A second trade is then made, with digital currency B being traded into a third currency (C). Finally, cryptocurrency C is converted back into the original currency A, enabling the trader to benefit from rate inconsistencies across all three currency pairs.
The pros and cons of crypto arbitrage over other types of digital currency trading?
The cryptocurrency markets are renowned for their extreme volatility. This means that they experience rapid price movements that offer lucrative opportunities. However, greater potential profitability also translates to higher exposure.
The primary advantage of crypto arbitrage is that it is considered to be an exceptionally low risk investment option, making it a far safer way to benefit from the digital currency markets. Yet, in spite of this, crypto market volatility does present one significant drawback for the arbitrage trader, particularly on crypto/fiat transactions. This stems from the fact that transferring currencies on and off exchanges is costly and time consuming. Coin prices can shift multiple percentage points per minute, yet it can easily take 72 hours to transfer fiat onto an exchange and the same again to transfer it off that exchange before it can be sent to another one. By the time you have taken foreign currency rates, crypto exchange trading fees and network charges into account, much of your profit can be eaten up before you have even finished your arbitrage trade.
So, how can this be overcome? Your first step, is to do your due diligence. As we mentioned earlier, each exchange is different. Some have better reputations than others and a regulated platform, while requiring verification documentation, which can take a while to process, is a far safer bet if you want to generate returns securely. When considering exchanges, your bottom line will be impacted by a number of factors. Firstly, what are their withdrawal times like? Do they perform them manually, once every few days or do they have a faster procedure? What about their liquidity levels? If you want to buy and sell substantial amounts of digital currencies then high market liquidity is key. Another serious consideration is how competitive they have made their trading, deposit and withdrawal fees. Obviously lower fees mean higher profit margins. Finally, how fast are their transactions? You want a blockchain that won’t have hour long delays at peak trading hours.
One option for lessening arbitrage risk is to lay the groundwork well in advance, by already holding fiat and digital currency on a few different exchanges so that when cryptocurrency arbitrage opportunities arise, you can seize them without delay, transferring funds between these exchanges quickly and simply.
While you would still be subject to network, deposit and withdrawal fees you would be able to neutralize the problem of delays with completing your transactions and effectively exploit emerging cryptocurrency arbitrage opportunities.
Equally, by seeking out larger volume cryptocurrency arbitrage opportunities you have the potential for higher profits, and they are less likely to be swallowed up in transaction charges when the price deviation is greater.
Another means of mitigating the risks inherent in arbitrage investing is through the use of an automated crypto arbitrage platform, which can track prices on dozens of exchanges at the same time and execute numerous transactions at once, completely instantaneously.
How can an automated crypto arbitrage system impact your bottom line?
An automated system, one popular example being ArbiSmart.com, is the preferred route for many arbitrage investors. The primary reason is that automated software far exceeds human capabilities. Sophisticated algorithms have the capacity to scan multiple exchanges simultaneously, 24 hours a day, responding in a split- second to the market and automatically taking advantage of price differences the second they occur. You needn’t spend hours in front of your computer monitoring the market so as to ensure you don’t miss the best crypto arbitrage opportunities. A crypto arbitrage system will prevent emotion from clouding the trader’s judgment and open the door to the crypto world to a wider audience, including those without a background in the financial markets.
As we can see, as with any form of digital currency trading, there are risks to exploring coin arbitrage opportunities. However, if you go in fully prepared, with a safe, reputable platform and the right algorithms monitoring the markets for you, crypto arbitrage genuinely does live up to the hype, enabling you to get your own slice of the rapidly growing cryptocurrency pie.