A Guide to Crypto Arbitrage Trading

 

Crypto Arbitrage Trading Guide

Crypto arbitrage can’t be described as a famous trading method among traders. Nevertheless, it’s one of the most low-risk options that doesn’t require significant efforts. Moreover, there is a vast number of bots and software that can help traders. If you would like to know more about this method, our article is for you. 

Cryptocurrency Arbitrage: Meaning

Cryptocurrency arbitrage is one of the money-making options. The idea of the arbitrage lies in benefiting from market inefficiencies.

If there is a difference in the price of one asset on different exchanges, a trader can profit from buying and selling it in different markets. The difference in rates will become a trader’s reward. This approach works for any security that has different prices at least at two exchanges (crypto arbitrage is also available within the same exchange). You can also use arbitrage for international currencies, metals, etc. 

Order Book: Definition

An exchange order book is a core element of asset arbitrage. The order book is an automated or manual list of current buy and sell orders for an asset. You can watch the video about how does an Order-Book work:

The order book has four essential terms you should be aware of. These are bid, ask, amount, and price. The amount and price show the number of units to be traded at a specific price. 

No matter what exchange platform you trade on, you will always see two sides of the bid and ask orders. They are used to evaluate the interest in buy/sell positions of a particular cryptocurrency. Bids represent buy orders, thus, how much and at what price a trader wants to purchase. The ask side shows sell orders. 

Buy-Sell side

Although this trading approach is not too complicated, it’s worth knowing some essential things. 

How Does Crypto Trading Arbitrage Work?

Let’s consider arbitrage trading step-by-step: 

  1. Find a cryptocurrency that is traded on at least two exchanges (it’s also possible to do arbitrage on a single exchange, but it’s easier to consider two different ones). 
  2. Gather the order books from both platforms to evaluate traders’ interest. 
  3. Compare opportunities on both exchanges and find the perfect correlation between them.
  4. Buy the asset on the exchange with the lowest price. 
  5. Withdraw the crypto asset to the second exchange. 
  6. Sell the cryptocurrency on the second exchange. 
  7. Keep buying and selling until your chosen correlation ends. 

For more information, watch the video guide

Can I Find Crypto Arbitrage Opportunities This Year?

Although cryptocurrency arbitrage has significantly changed, it’s still a profitable strategy that may lead to benefits if you apply it correctly. 

The amount you earn will also depend on the number of orders you place. According to recent estimations, one trade on Kraken and Binance platforms may bring an average profit of $15. This year you can expect a spread of 0.2%-2.5%, with an approximate benefit in the range of $10 and $50. Let’s imagine you earn $15 on average. If you find a cryptocurrency with a significant number of opportunities, you can earn up to $150 per day. 

To make your trades more profitable and fast, you can use 3Commas bot. It has collaborated with Binance and supports a wide range of exchanges. 3Commas provides a wide range of services, from standard analytics and automated bots to back-test portfolios and the monitoring of portfolios of other users’. 

Simple & Triangular Arbitrage

Crypto arbitrage has several types. We will start with the most common ones. Simple and triangular approaches have a significant difference. Applying the simple method, you buy and sell one currency, usually on two exchanges. When using triangular arbitrage, you have to deal with three cryptocurrencies, but you can use a single platform. Nevertheless, a simple way is more comfortable than the triangular one. 

Triangular Cryptocurrency Arbitrage

A triangular arbitrage can also be called cross-currency arbitrage and three-point arbitrage. It may take place on a single exchange or several. As you can understand from the name of the approach, this arbitrage connects three assets. The idea is simple – trade the first currency to the second one, the second one to the third one, and in the end the third one to the first one. 

Look at the scheme below to catch the idea. 

triangle crypto arbitrage

There are 5 steps you should follow in triangular arbitrage trading:

  1. Find three assets that can be easily arbitraged. 
  2. Choose the cryptocurrency you would like to end up with. 
  3. Trade it to a second crypto asset. It should connect to the first and the third currencies. 
  4. Trade the second cryptocurrency to the third one. 
  5. Convert the third currency to the first one. 

The main advantage is that in all triangular trades, a trader gets a riskless profit as soon as the second trade is fulfilled. However, this type of arbitrage is rare. Moreover, it’s not easy. Thus, traders prefer using bots and software. Also, as you have to deal with three cryptocurrencies, your capital should be large enough. 

What Is Statistical Arbitrage?

Statistical arbitrage is the most complicated approach. It requires plenty of mathematical calculations and outstanding analytical skills. That’s why traders mostly use bots that provide all the necessary calculations. 

When trading statistical arbitrage, traders open short and long positions at the same time. This type of arbitrage provides a degree of risk as it is based on historical price meanings. However, the price never repeats previous movements with 100% accuracy. 

Mostly, statistical arbitrage uses mean-reversion models. Traders invest in highly diversified portfolios with lots of securities (growing to thousands). It’s a type of short-term financing that ranges from a few seconds to several days. 

The cointegration approach is the core of a mean-reverting relationship between two cryptocurrencies. Let’s consider a famous simple example. 

Imagine we have a man and a dog. The man is returning from a bar. The dog is walking around. Their paths are highly unpredictable. What if it’s the man’s dog? Then, they will still move randomly but within a particular distance from each other. 

Some pairs have a mean-reverting relationship. For example, Ethereum and Ethereum Classic. The last one was created through a fork of Ethereum. Although they are separate crypto assets, Ethereum Classic is just a derivative of Ethereum. 

Another example is Monero and ZCash. These crypto assets have the same idea. They were created to provide anonymous transactions. None of them was offered via ICO. Also, Monero and ZCash provide top privacy features. 

Best Exchanges for Crypto Arbitrage

Knowing how to trade on the arbitrage is not the final step to your success. It’s crucial to choose a reliable cryptocurrency exchange. If you want learn more about using Binance for successful trading, read our article How to trade on Binance.

What are the main features of a trustworthy exchange? First, it should have operated in the market for at least several years. Second, it should charge low fees. If you have to deal with enormous fees, all of your gains will disappear. Third, it should provide a high level of security. To find out how secure it is, check reports about hack attacks. 

If you find an exchange that seems to be a low-cost one, never rely just on price. It may cost all of your capital. Also, you should check the reviews of other users that are supposed to provide accurate information. 

There are a few exchanges that have proven to be reliable. Let’s consider the most famous ones – Binance, Coinbase, and Bitfinex:

  • Binance. Binance is, without a doubt, the most famous crypto exchange. It charges relatively low fees and it’s one of the most secure platforms for trading. Binance operates worldwide, which proves its reliability. If you want to know how to use Binance for successful trading, read the article How to trade on Binance.
  • Bitfinex. Bitfinex is one of the leading crypto platforms that offers a convenient interface and 24/7 support to its clients. Moreover, you can personalize the interface of the app, which will serve your aims. This platform offers a demo account you can use to test trading strategies. On the website, you can find price and trade volumes for coins.
  • Coinbase. Coinbase is another world’s digital asset exchange firm. It offers a platform for purchasing and selling cryptocurrencies. It’s also one of the most secure platforms that operates significant funds and provides a high-level of security to protect the funds of its clients.

Crypto Arbitrage: Fees to Pay

Many traders, especially newbies, count only the profit they will gain from successful trades. However, they forget about the costs they will have to deal with. Fees may take a good chunk of your gains without you even noticing it. Let’s consider what costs you may face. 

Fiat Deposit / Withdrawal Fee

It’s the most common fee that is applied to any market operations. The fee is charged by an exchange when you deposit and withdraw funds to your bank account or a credit card. It’s unlikely you will find an exchange that doesn’t charge this type of fee. Thus, you should aim to find the lowest fee. 

The size of the fee will depend on the payment method. If you use a credit card, the transaction will occur immediately. However, cost is the largest one. Many exchanges and brokers use a wire transfer. It’s a little bit slower, but the fee is lower as well. In the case of a direct deposit, you will pay the smallest fee. At the same time, the time of the transaction will increase significantly. 

Transaction Fee

There are three main types of transaction fees. These are a fixed fee, maker fee, and taker fee. A fixed fee doesn’t change regarding the asset, volume, and order books. If you want to execute the trade immediately, you pay a taker fee. If market conditions don’t match your expectations, you can wait some time for the perfect match. Then you will pay a maker fee that usually exceeds the taker fee by 2-3 times. 

Cryptocurrency Deposit/Withdrawal

It’s a common practice that exchanges don’t charge fees if you deposit cryptocurrencies. However, if the exchange needs to create a new address for your asset, you will have to pay a fee. 

The withdrawal fee is not always present. It changes depending on the exchange you trade on. Some exchanges don’t charge this fee. 

How to Make Your Fees Lower

Here are our recommendations:

  • If you find a perfect match between two assets, your order will be executed without a time lag. Thus, you won’t have to pay fees. 
  • Another obvious tip is to use cryptocurrency exchanges that charge low fees or don’t apply them at all. Read the terms & conditions carefully to be aware of any possible fee the exchange may charge from you.
  • Some exchanges don’t charge fees if you withdraw coins. Nevertheless, they usually apply fees if you want to withdraw fiat currency.
  • The credit card fee is the largest among others. Thus, to have fast but not so expensive transactions, choose wire transfer.
  • If you find an exchange with the deposit transaction, you have the chance to lower the fees you will need to pay. 

Crypto Arbitrage Software & Robots

Although crypto arbitrage seems like an easy deal, it has some pitfalls you can encounter. Thus, even professional traders use different software and robots that help them place orders and find perfect asset matches. Fortunately, there is a wide range of software that makes the path of the trader much easier. 

How Does A Crypto Arbitrage Bot Work?

Bots serve two main purposes. First, they can limit the amount of tedious work for a trader. Thus, giving them time to look for a perfect opportunity. Second, they are set to beat the market and profit from it regularly. 

A crypto arbitrage bot is a set of instructions that are based on market conditions. As soon as they are met, the bot executes trades without the participation of an individual. 

Crypto arbitrage bots are programmed to find price mismatches among several markets or exchanges. They can be set for different types of arbitrage. Thus, they follow different strategies to serve the trader’s aims. 

Crypto Arbitrage Software

Crypto arbitrage software is mostly used to create your trading strategy or a bot without specific coding skills. Strategies are based on particular indicators. The software is a more complicated and comprehensive tool for crypto arbitrage than robots, as bots are just a part of them. 

Automated Crypto Arbitrage. Is It Possible?

Automated arbitrage becomes more and more popular as it’s more accurate (if the settings are correct) and saves traders’ time. There are plenty of platforms and robots that provide trading signals or also execute trades under specific conditions, but traders can implement their own Expert Advisors if they are familiar with coding. 

Crypto Arbitrage: Platforms and Monitors

The crypto arbitrage platform and monitor software are used by traders to find arbitrage opportunities between some cryptocurrencies and altcoins and different crypto exchanges in real-time mode. They also support the use of many arbitrage strategies and liquidity management and help traders follow market conditions within one app. 

Arbitrage platforms are developed to connect buyers and sellers. Such platforms provide trading on different exchanges, usually differ and have a large number of payment methods. Also, some platforms offer additional ways of gaining rewards. For example, Paxful provides a premium on different payment methods. Also, you can do crypto arbitrage in the markets of different countries. For instance, if you sell BTC, you can find a market where BTC is harder to purchase, so its price is higher. 

3Commas is another example. It’s a trading terminal and has bots that provide a wide variety of instruments for successful trading. 

BTC: Let’s Arbitrage

Let’s consider how you can arbitrage the first cryptocurrency, BTC. 

Simple Arbitrage

We will consider two exchanges – Bitstamp and  Coinbase. 

The price of Bitcoin on Bitstamp is $9,224.13, on CoinBase it’s $8,165.15. As we can see, the difference is around $1,059. 

  • Step 1. Let’s imagine you buy 100 BTC on Bitstamp for $8,165.15. Thus, you spend $816,150. Coinbase
  • Step 2. Transfer coins to Coinbase.
  • Step 3. Sell 100 BTC at Coinbase for 9,224.13. So, you earn $924,130. Bitstamp
  • Step 4. Subtract $816,150 from $924,130. Your profit is 107,980.

However, you should remember the fees you may be charged for deposit and withdrawal. 

BTC Triangular Arbitrage

Imagine we are trading on one exchange. We take three popular cryptocurrencies. They are Bitcoin, Ethereum, and BNB (Binance Coin). The main idea of triangular trading is that you end up with the cryptocurrency you started with. 

We trade Bitcoin. To calculate the profit you will get from the triangular arbitrage, you will need to calculate the bid and ask the prices for all three pairs. Guess exchange rates for BTC/BNB amounts to 462,963, BTC/ETH – 48,9809, ETH/USDT – 148,94, and BNB/USDT – 15,37. We need to include the rate of USDT because we don’t have an exchange rate for the BNB/ETH pair.

What do we have? We will exchange 1 BTC to ETH with the bid price of 48.809 ETH. Then we would exchange the result to USDT and BNB (48.809 ETH = 472.9747 BNB). The last step is to exchange BNB to BTC (472.9747 BNB = 1.0216 BTC). Your profit is nearly 2.5%. 

Calculator

In the example above, we considered simple calculations that don’t include fees. However, you should always remember that fees may shorten your profits significantly. Thus, it’s better to use software or platforms that calculate all of the operations and show your profit with 100% accuracy. 

If you still don’t want to use platforms, you can make your own calculation. Check the arbitrage calculator we created for two exchanges – Bitfinex и Binance. 

Please copy this Google Spreadsheet document to your Google Drive or download it as an Excel file, so you can change any values:

Terms To Know

  • Fiat (fiat money). It’s common money issued and maintained by governments. The money you use for daily purchases and service payments. For example, euro, British pound.
  • Crypto Asset. It’s a digital asset created as an open and decentralized means of payments. It’s recorded in the blockchain. There are four types. These are a cryptocurrency, platform tokens, utility tokens, and transactional tokens. 
  • Volatility. It’s a degree of price fluctuations. High volatility refers to huge market fluctuations caused by unexpected events. Low volatility means small changes in the price due to the lack of the traders’ interest.
  • Order Book. It’s a ledger that combines all of the necessary information about current buy and sell orders that helps traders make their decisions.
  • Deposit. It’s the amount of money you are ready to invest in your account to purchase a security.
  • Withdrawal. It’s the amount of money you can take from your account after successful trades.

Conclusion

You should definitely use crypto arbitrage if you want to profit in the crypto market. It’s an absolutely legal method of money-making. Moreover, bots and software will make your trading easier and more efficient. But even though this trading method is not complicated, there are several drawbacks you should be aware of before entering the market. 

Benefits and Risks

It seems that arbitrage trading brings only benefits, it hides some drawbacks you should consider before using it. 

 Benefits   Risks 

  • Relatively low-risk
    It’s a relatively low-risk trading option that may bring remarkable rewards if you know how to use it. 

  • KYC Regulations
    KYC stands for “know your customer.” If you are a newbie on the cryptocurrency exchange, it may take up to several days to validate your account and withdraw funds. Thus, before you start doing arbitrage, make some transactions to gain credence. 

  • Many Exchanges
    There are many exchanges where you can find exciting opportunities for arbitrage trading. 

  • Exchange hacking
    Although cryptocurrency exchanges have existed for many years, they are still a victim of hacking. Thus, there is a high risk of money-losing. 

  • High Volatility
    Although high
    volatility is a potential danger, if you know how to use it in your favor, it may provide outstanding arbitrage opportunities. The cryptocurrency market is considered one of the most volatile ones. 

  • Exchange fees
    If you use two exchanges for crypto arbitrage, you should be aware of the possible time lag that will occur from the time when you start withdrawing money, to the time when they will appear on your second account to complete that arbitrage operation.

  • Large trades are required
    It doesn’t matter what market you trade in; only big capital will bring significant rewards. If you do cryptocurrency arbitrage on several exchanges, you should keep in mind the fees for withdrawal operations. 

  • Too fast
    Although the idea of cryptocurrency arbitrage is easy, not many traders succeed because it requires a considerable amount of time to analyze the market, find the perfect opportunity, and transfer money with a limit lag. 

  • Withdrawal limits
    Before doing arbitrage, check the terms & conditions. If the exchange has a limited withdrawal amount, you won’t succeed in arbitrage.

FAQ

👮‍♂️ Is Arbitrage Legal?

Cryptocurrency arbitrage is entirely legal. The core idea of arbitrage is that a trader buys and sells a crypto asset like any other security in a market. 

🤑 Is Crypto Arbitrage Profitable in 2020?

Crypto arbitrage is still profitable. According to the calculation of trades on Binance and Kraken exchanges, you can earn at least $15 for a trade. Thus, the amount you receive will depend on the opportunities you find on exchanges. Moreover, the development of cryptocurrencies worldwide had made the markets more stable and exchanges more reliable. 

💱 Is Crypto Arbitrage on the Same Exchange Possible?

Yes, you can do arbitrage either on a single exchange or by transferring money between several exchanges. 

💲 What Are the Best Crypto Arbitrage Pairs in 2020?

As BTC is one of the leading cryptocurrencies, you should find coins that are paired with it. For example, BTC/LTC, ETH/BTC, and even BTC/USD

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