Crypto Arbitrage: How It Works & Trading Strategies

What Is Cryptocurrency Arbitrage?

Arbitrage in cryptocurrency refers to the practice of investors purchasing a cryptocurrency on one exchange and then immediately selling it on another exchange at a better price. This practice is known as "cryptocurrency arbitrage."

Cryptocurrencies are traded on hundreds of different exchanges, and the price of a currency or token may vary from one exchange to another depending on the specific market conditions. Arbitrage is a tactic that may be used in this situation: In the same way that arbitrage may be used to make potential profits in the capital markets, crypto arbitrage is a legal way to make money when an asset is selling for a lower price in one market and a higher price in another market.

Having said that, cryptocurrency arbitrage is not without its potential dangers. The concept of crypto arbitrage and the trading techniques that take advantage of it are broken down and examined in further detail below.

Why Are Crypto Prices Difference Across Exchanges?

The cryptocurrency markets are not regulated, and cryptocurrencies themselves are decentralized. This means that, with the exception of stablecoins, cryptocurrencies are not tied to the value of any government currency or fiat currency, such as the dollar. Because there is no one standard price for every coin or token, the values of the many cryptocurrencies might fluctuate substantially from one another. This is one of the key causes of this phenomenon.

In this vein, some cryptocurrency exchanges are much larger than others, as measured by the number of trades they do. As a result, supply and demand on one exchange can be quite different from those on another, which might have an impact on the price.

Last but not least, the costs of trading cryptocurrencies can be very different and add to the price of your transactions as a whole.

What Types of Arbitrage Exist?

The practice of crypto arbitrage may be carried out by investors in a variety of different ways, depending on the cryptocurrency they choose to trade.

Spatial Arbitrage

The trading of virtual currencies across two distinct exchange platforms is what is meant by the term "spatial arbitrage." Spatial arbitrage could make it easier to do crypto arbitrage.

Even though geographical arbitrage is a simple strategy that can make money from price differences, it puts traders at risk by making them deal with things like longer transfer times and more costs.

Spatial Arbitrage Without Transferring

Some traders make an effort to steer clear of the potential hazards that spatial arbitrage presents regarding the costs and timings of transfer. For instance, in a made-up scenario, they may buy Bitcoin on one exchange, sell it on another, and then wait until the prices on both exchanges coincide before making any more moves.

Because of this, they are able to steer clear of the hassle of moving currencies and tokens from one platform to another. However, there is a possibility that trading costs will still apply.

Triangular Arbitrage

The triangular arbitrage strategy is one that takes advantage of price inefficiencies on an exchange by trading between three separate pairs of cryptocurrencies. An investor begins with one cryptocurrency and then trades it on the same exchange for another cryptocurrency that is undervalued in comparison to the first cryptocurrency they had. This is one way to profit from investing in cryptocurrencies.

The investor would then make a deal in which the second cryptocurrency would be exchanged for a third cryptocurrency that has a considerably higher price than the first cryptocurrency. In the last step of the process, the investor would swap the third cryptocurrency for the first coin, thus completing the circuit and perhaps improving their financial position.

How to Take Advantage of Crypto Arbitrage Algorithmically

At first glance, it might seem like all you need to do to make money with cryptocurrency arbitrage is look for price differences between different exchanges, make the necessary trades, and keep the difference as profit.

In 2017, there was a moment that became famous when the price of Bitcoin on Kraken was $17,212, while the price of Bitcoin on Bitstamp was just $16,979, which presented a chance for arbitrage. In this case, an investor could make a profit of $233 per Bitcoin by buying the cryptocurrency on Bitstamp and then selling it right away on Kraken.

Even if spreads don't usually look like the one seen above, there are instances when alternative, less well-known kinds of cryptocurrency might produce gaps that are even greater. Arbitrage possibilities may arise at any moment for those who invest in cryptocurrency due to the fact that the values of cryptocurrencies might fluctuate from one cryptocurrency exchange to another. There are thousands of cryptocurrencies trading on hundreds of cryptocurrency exchanges.

There are a number of applications available for download by investors, each of which monitors the price of Bitcoin as well as the price of other cryptocurrencies in order to identify potential arbitrage possibilities. Investors are able to take advantage of algorithms that automatically search for arbitrage opportunities across many cryptocurrency exchanges in this manner. Using an automated strategy like this one, crypto-arbitrage traders may be able to profit on a variety of price differences.

How to Find Crypto Arbitrage

When it comes to arbitrage, not all cryptocurrencies and digital assets are created alike, and there are many different approaches to locating chances for arbitrage.

Method 1: New Software

Finding opportunities in the cryptocurrency market may be difficult since many different cryptocurrencies are trading on so many exchanges. Because of this, a significant number of traders make use of software apps that monitor the real-time activity of hundreds of cryptocurrency exchanges.

There is now a rise in the number of businesses specializing in the development of software to automate crypto arbitrage. Certain businesses provide investors with technology that enables them to choose an automatic arbitrage plan and then carry it out across several exchanges.

Method 2: Less Popular Cryptocurrencies