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Crypto Arbitrage Trading Guide

A Guide to Crypto Arbitrage Trading

SEP 3, 2020
19 MIN

Crypto arbitrage is one of the most low-risk options for traders. With a vast number of bots and software options that can help traders, it doesn’t require significant effort. To find out more about this method, this article is for you!

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Cryptocurrency Arbitrage: Meaning

Cryptocurrency arbitrage is a money-making option. The idea of 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 in different markets, and the difference in rates will become a trader’s reward. This approach works for any security that has different prices on at least two exchanges (crypto arbitrage is also available within the same exchange). Arbitrage can also be used for international currencies, metals, etc as well.

Order Book: Definition

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

Play video

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.

Regardless of exchange platform, users will always see two sides of the bid and ask orders and are used to evaluate the interest in buy/sell positions of a particular cryptocurrency. The bid represents the buy order, how much and what price a trader wants to purchase. The ask shows the sell orders.

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

Play video
Play video

Can I Find Crypto Arbitrage Opportunities This Year?

Although cryptocurrency arbitrage has changed significantly, it remains a profitable strategy that can lead to benefits when applied correctly. The amount earned depends on the number of orders placed. To make your trades more profitable and faster, users can deploy the 3Commas bot, which has collaborated with Binance and supports a wide range of exchanges. 3Commas provides standard analytics, automated bots, back-test portfolios and the monitoring of portfolios of other users.

Simple & Triangular Arbitrage

Crypto arbitrage has several types, and the simple and triangular approaches have a significant difference. When applying the simple method, users buy and sell one currency and usually on two exchanges. When using triangular arbitrage, users deal with three cryptocurrencies, but most often on a single platform. Most often the simple way is more comfortable than the triangular one.

Triangular Cryptocurrency Arbitrage

A triangular arbitrage can also be called cross-currency arbitrage or three-point arbitrage and may take place on a single or several exchanges. This arbitrage connects three assets, and the idea is simple – trade the first currency to the second one, the second one to the third one, and the third one to the first one. For a better idea, look at the scheme below:

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 a riskless profit as soon as the second trade is fulfilled. However, this type of arbitrage is rare, and is not easy, so traders usually prefer to use bots and software. As users have to deal with three cryptocurrencies, the capital should be large enough.

What Is Statistical Arbitrage?

Statistical arbitrage is the most complicated approach as it requires complicated mathematical calculations and outstanding analytical skills – which is why traders mostly rely on bots to provide all the necessary calculations. When trading statistical arbitrage, traders open short and long positions simultaneously, which provides a degree of risk as calculations are based on historical price meanings and the price never repeats previous movements with 100% accuracy.

Statistical arbitrage most often uses mean-reversion models where 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.

Some pairs have a mean-reverting relationship, such as Ethereum and Ethereum Classic (which was created through a fork of Ethereum), but 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 of success. It’s crucial to choose a reliable cryptocurrency exchange. If you want to learn more about using Binance for successful trading, read our article: How to trade on Binance.

The main features of a trustworthy exchange are: first, ensure the currency has operated in the market for a few years. Second, ensure low fees. If enormous fees are required, gains will disappear. Third, ensure a high level of security. To find out how secure it is, check reports about hack attacks. However, never rely on only the price and check other user reviews for more accurate information.

There are a few exchanges that have proven to be reliable. The most famous are: 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 those new to trading crypto, account the profits they gain from successful trades but forget about the additional costs. Fees can be expensive, so consider:

Fiat Deposit / Withdrawal Fee

The fiat deposit or withdrawal fee is the most common fee applied to any market operations. Charged by an exchange when you deposit and withdraw funds to your bank account or a credit card. It is unlikely to find an exchange that doesn’t charge this fee, so look for the lowest. The amount of the fee will depend on the payment method.  When using a credit card, the transaction will occur immediately, but it is more expensive. Whilst slower, many exchanges and brokers use a wire transfer as the fee is lower. Direct deposits, however, demand the smallest fee.

Transaction Fee

There are three main types of transaction fees; fixed, taker and maker fees. A fixed fee doesn’t change regardless of the asset, volume, or order books. A taker fee enables a trade to be executed immediately, but if the market conditions don’t match expectations, traders can wait for the perfect match; a maker fee – which usually exceeds the taker fee by 2-3 times.

Cryptocurrency Deposit/Withdrawal

It’s common practice that exchanges do not charge fees when depositing cryptocurrencies. However, if the exchange needs to create a new address for the asset, a fee will incur. A withdrawal fee is not always present, but it changes depending on the exchange. 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. Professional traders choose to use different software and robots to help them place orders and find perfect asset matches. Fortunately, there is a wide range of software options that makes the path of the trader much easier.

How Does A Crypto Arbitrage Bot Work?

Bots serve two main purposes; to limit the amount of tedious work for a trader to allow them time to find a perfect opportunity, and to beat the market and profit from it regularly. A crypto arbitrage bot includes a set of instructions that are based on the 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 and often follow different strategies to serve the trader’s aims.

Crypto Arbitrage Software

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

Automated Crypto Arbitrage. Is It Possible?

Automated arbitrage becomes more popular as it gains accuracy (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 is used by traders to find arbitrage opportunities between cryptocurrencies, altcoins and different crypto exchanges in real-time mode. They also support the use of many arbitrage strategies and liquidity management as well as helping traders to follow market conditions within one app.

Arbitrage platforms are developed to connect buyers and sellers. Such platforms provide trading on different exchanges and have a large number of payment methods. Some platforms offer additional ways of gaining rewards, for example, Paxful provides a premium on different payment methods. Traders can also engage in crypto arbitrage in markets of different countries, for instance, if traders sell BTC, they should seek a market where BTC is harder to purchase, so its price is higher. 3Commas operates as 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.
  • Step 2. Transfer coins to Coinbase.
  • Step 3. Sell 100 BTC at Coinbase for 9,224.13. So, you earn $924,130.
  • 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 (

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,

What do we have? We will exchange

Calculator

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

If traders still don’t want to use platforms, they can make their own calculations. Check the arbitrage calculator we created for two exchanges – Bitfinex and 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 highvolatilityis 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

  • 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. 

  • 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. 

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

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

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