There are many ways to trade cryptocurrencies. However, if you want to find a fast and easy way to earn money, then crypto arbitrage trading is what you need.
As a crypto trader, you are no stranger to the many crypto exchanges that are around for the buying and selling of cryptocurrencies. But did you know there is a modern form of market trading that is making money for crypto traders, including yourself?
This form of market trading that includes all assets at your disposal to make investment decisions is known as crypto arbitrage. Crypto arbitrage trading has become one of the most popular ways to trade cryptocurrencies. It is, in fact, a modern form of market trading that you can use to earn money.
So here, what is crypto arbitrage trading? How can you make money with it? In this article, we’ll go through everything and give you the steps to take to do your own crypto arbitrage.
Crypto arbitrage is simply buying and selling cryptocurrencies on different exchanges. The differences in the buy and sell prices on different exchanges are known as price gaps or arbitrage opportunities.
When price gaps occur, it means that you can make an instant profit by buying something on one exchange and selling it for a higher price on another exchange. The purpose of this trading technique is to make an income from buying and selling cryptocurrencies with minimal risk and effort.
Why is the price different on the crypto exchange?
Cryptocurrency arbitrage exists because of the differences in prices between different exchanges. If you look at coinmarketcap.com, you will see there are lots of exchanges that have different prices for the same crypto assets.
Cryptocurrency exchanges are aware of this phenomenon and have tried to put measures in place to ensure that they get the best prices themselves. However, if they don’t monitor the prices of their competitors, it’s possible for traders to exploit these differences and make a profit from crypto arbitrage trading.
Centralized exchange: The limit order feature on a centralized exchange makes the gap price huge. On a centralized exchange, price depends on the most recent matched price from the order book, and that price is considered the real-time price on the exchange. For example, if the market price is $39,128/BTC but the trader asks Bitcoin for $40,000 and it matches, then $40,000 becomes the real-time price of bitcoin.
Decentralized exchange: To keep the price in line, decentralized exchange follows an automated market maker or smart contract system. Instead, order book DEX relies on liquidity pools. Every pool is funded by contributors, and the price of both pairs is maintained by a mathematical formula. For example, if a trader wants to buy ETH from the ETH/USDT pool, he would have to add USDT to the pool to remove ETH. So to maintain the balance system, automatically increase the ETH price and decrease the USDT price.
Types of crypto arbitrage trading.
There are several ways crypto arbitrageurs can profit off of market inefficiencies. Some of them are.
Statistical arbitrage: This trading involves statistical and high mathematical calculations, and it can only be done by trading bots.
Cross-exchange arbitrage: This is the simplest form of arbitrage trading, where traders buy on one exchange and sell it on another exchange.
Spatial arbitrage: Also called geographical arbitrage, takes advantage of price differences between markets for the same asset due to supply and demand factors. This type of crypto arbitrage involves buying and selling assets from different exchanges based on price.
Triangular arbitrage: Here, only one exchange involves more than two pairs to create a trading loop that ends with the same coin as the started coin. For example, BTC-USDT-ETH-BTC.
Decentralized arbitrage: In this arbitrage, traders can take advantage of a liquidity pool that may be undervalued or overvalued.
Time Arbitrage: Time arbitrage takes advantage of the fact that prices in different markets are updated at different intervals. This allows you to buy an asset in a cheaper market and sell it quickly in a more expensive market before the price changes.
How does crypto arbitrage trading work?
Crypto arbitrage is a trading strategy that takes advantage of price differences. It involves the simultaneous purchase and sale of an asset to profit from the difference in price. In the case of cryptocurrency, this is done when the price difference is significant with regard to other exchanges.
To understand how crypto arbitrage works, let us consider the following example. A trader purchases 1 BTC from Exchange Kucoin at $30,000 and then sells it on Exchange Binance at $30,120. The trader makes $120 through this transaction as a profit. This process can be repeated over and over again until one gets tired or finds an opportunity to make more money through another strategy.
How to Find a crypto arbitrage trading opportunity.
Discover which exchanges have the highest price disparity of a particular digital currency (e.g., Bitcoin) using an online calculator such as Cryptocompare or Coinmarketcap. Once you have figured this out, it’s best to determine which exchange has the lowest trading fees and has high liquidity (i.e., high volume). High volume indicates that you will be able to buy and sell crypto assets quickly without having to worry about affecting the market price.
Go to Coinmarketcap or Coingecko click on the coin you want to trade, and then go to the market section. Here you can see all the current exchange rate. You can change the filter from lowest to highest to find the best price. Make sure your selected pair is USDT, because almost all exchanges support USDT pairs unless you use decentralized exchanges.
How to start crypto arbitrage trading.
Cryptocurrency arbitrage is a great way to make passive income with almost no risk. However, for those looking to make money on crypto, crypto arbitrage trading is not so simple. It’s possible that you could lose money if you don’t know what you’re doing.
You can do crypto arbitrage in two ways. That is.
By self: In this way, traders have to do all the work by themselves. To start, create an account on at least two different exchanges and then buy any coin (ex-BTC) that has a cheaper price than others. After that transfer, where have high demand and price and sell it? It’s a more free but time-consuming method than others.
By trading bots: Transaction speed and fast price volatility make arbitrage trading hard, but thanks to crypto bots. By using bots, traders don’t have to do anything manually except connect to their exchange. When you execute the trade bots, find the best price to buy and sell on Connect Exchange without transferring any funds.
The only thing you may hate is the setting. All bots required some technical setup to run and also traders have to pay to access more bots features.
Advantage of crypto arbitrage trading.
It involves buying low and selling high—what could be better than that?
You can make huge profits in a short time period; you don’t need to wait long years for your investments to grow in value.
There are limited risks involved—there is no risk of theft or financial fraud like hacking or Ponzi schemes.
Need no crypto trading or market analysis experience.
Best suitable for the volatile market.
Disadvantages of crypto arbitrage trading.
Crypto arbitrage is a lucrative business for many investors. However, it does have some risks and disadvantages attached to it too.
You have to create and manage multiple accounts, which consumes time, and KYC is annoying as well.
For arbitrage trading, you have to transfer crypto quickly in order to take advantage of the price. While performing this step, any mistake (especially putting the address) can cause a permanent loss of money.
Low volume is another problem of crypto arbitrage, which means you will face problems executing a large amount of trade.
Transaction cost is one of the huge barriers between exchanges, giving the best arbitrage. Your profit will be negligible if you do not focus on transaction costs.
After the transaction cost, the buying fee also plays a major role in your arbitrage profit. Here, the third party involves buying crypto with fiat, and they charge a huge percentage of the fee. Currently, “Legendary Trading” is considered the cheapest third party to buy crypto, which charges 0.08% per transaction, but sadly, it does not support every exchange.
The slower transaction is another halt to crypto arbitrage trading, and you can do nothing about that. Bitcoin transactions take much longer to be processed when compared to Ethereum (ETH) transactions.
It happens rarely. If your country has no proper rules and regulations about crypto, then they might have a chance to impose a money laundering case on you because you are transferring money overseas.
Things follow during crypto arbitrage trading.
Avoid third parties, such as Master or Visa cards or Wire, that charge a huge fee to buy crypto. Currently, Legend Trading is only charging a 0.08% fee.
Do not trade with a small amount; otherwise, you won’t get better results. Instead, aim to make 2–5 percent profit according to the amount in one transaction.
To reduce transaction fees, avoid ERC20 tokens or any coin that affects your profit. And also keep an eye on the maker and taker fees on the exchange.
If possible, target new listing coins because of low demand; the price could be lower than on other exchanges.
You have to log in several times to enable all features and ensure strong security to avoid any risk or hack threat.
To avoid money loss, limit loss features.
Timing plays an important role in crypto arbitrage, so make sure all processes are done quickly.
Trading different types of digital assets like bitcoin, Litecoin, and Ethereum can be a great way to make profits. The best part is that the potential risk involved is very low when compared to traditional forms of trading. This makes crypto arbitrage a great option for traders who have little to no experience in the world of cryptocurrency trading.