Crypto Arbitrage Guide

Market Meditations | June 14, 2021

?‍? Fancy As It Sounds?

Much like the rest of crypto, it’s not as fancy or complicated as it sounds. With the right explanation and resources, anyone can do it. Arbitrage is when a trader buys crypto on one platform and sells it on another to take advantage of price discrepancies. Take an example:

  • A trader could sell 1 BTC on Binance for $45,000 and buy 1 BTC on Coinbase for $100 cheaper.
  • On the face of it, it’s a fast and low-risk way to earn $100

Arbitrage is possible in traditional markets too. The difference is that instead of having a couple of highly regulated “official” exchanges, in crypto there are dozens of exchanges. And because crypto trades on all these exchanges simultaneously, there is no official price for a coin like BTC. Short term supply and demand on platforms can create a situation where the same asset is priced differently depending on the exchange. 

Whilst it may seem somewhat ingenuine, arbitrage is actually an essential part of every market. When people spot and trade these discrepancies, they eliminate inefficiencies and ensure that prices remain fair.

The Appeal

There’s a good few reasons why traders engage in crypto arbitrage:

  • Low Risk. Arbitrage traders occur over minutes or tens of minutes. Basically as long as it takes to buy on one platform and sell on another. As such, an arbitrage trader shouldn’t be exposed to massive price swings or risk of liquidation.
  • Less Competition. There are relatively less people to compete with in crypto arbitrage compared to in traditional markets.
  • Plenty of Opportunities. Professional arbitrage traders tend to focus on BTC and ETH but there are hundreds of coins to choose from.
  • Extreme Volatility. Big price movements create large discrepancies in pricing which can be great opportunities to spot arbitrage.

Arbitrage Methods

1️⃣ Coinbase Premium

Perhaps the most simple method is to utilise the Coinbase Premium. Coinbase is amongst the most trusted exchanges in the world (particularly in North America because it is based in the USA and therefore subject to high regulation). There is a lot of institutional demand for Bitcoin on Coinbase. So much so that crypto starts to trade for a premium on the exchange (BTC price can end up being high on Coinbase compared to other platforms). And so, a common arbitrage method is to buy BTC on another exchange and sell it on Coinbase for a profit.

2️⃣ Hold Crypto on Two Different Exchanges 

Hold cryptocurrencies on two different exchanges. Whenever there is a price discrepancy, the arbitrage trader can buy crypto on one exchange and sell it on another at the same time.

3️⃣ Crypto Arbitrage with a Bot

Using a bot is one of the easiest ways to increase your profits from crypto arbitrage trading. Bots trade 24/7, meaning they can capture trading opportunities while you are sleeping or eating your lunch. Ideally, a trader would have enough coding experience to program their own bots. This allows for customization. Alternatively there are free and paid crypto arbitrage bots.

? This method requires its own section on what a bot is, examples of crypto arbitrage bots and also some analysis on if and when bots are worth the time and money. We’ll dedicate a full section to this in Thursday’s newsletter. To receive this, make sure you’re on our free email list ?

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All That Glitters Is Not Bitcoin

Our priority will always be to present a fair and truthful analysis. We’ve discussed potential benefits of arbitrage and now it’s time to consider drawbacks, so our readership can make an informed decision:

  • Withdrawal fees. An exchange can charge high withdrawal fees which impacts the profit on an arbitrage trade. Higher fees, lower profit. XLM, XRP and NANO are some of the coins that are preferred by arbitrage traders (fast and cheap to send).
  • Slippage. If trading volume is low, your order may not execute at the price you want. To avoid this, arbitrage traders tend to prefer arbitrage on the largest exchanges with lots of volume.
  • Confirmation times. Withdrawing from one exchange to another typically takes 30 minutes at a minimum (this might impact your window of opportunity).
  • Locked accounts. If you make a lot of withdrawals in a short amount of time, you might even have your account locked.
  • Competing against bots. Arbitrage trading is about timing. You need to spot a discrepancy and be quick to trade it. When there are bots doing the same thing, this can become more difficult.

❇️ Conclusion

Crypto arbitrage can be very profitable but there are some obstacles in the way. It takes some time and research but once you find your method/strategy, it can be a reliable way to make profit. . Remember, if you want to receive our guide on using bots, how to use them for arbitrage and whether they are worth it, join the free market meditations community.