What is Cryptocurrency Arbitrage?
Cryptocurrency arbitrage is a trading method that exploits the price differences of one or more crypto assets on multiple exchanges. For example, the price for 1 Bitcoin on Coinbase is $10,000. The price for 1 Bitcoin on Kraken is $10,050.
An arbitrage trader would purchase the Bitcoin for $10,000 on Coinbase and sell it for $10,050 on Kraken, netting him a profit of $50.00.
Seems simple right? Well, there are many things to consider if one wants to get started in the crypto arbitrage game. We will explore each one below.
What Makes Cryptocurrency Arbitrage Possible?
Each cryptocurrency exchange has a certain amount of liquidity for each crypto asset it lists. Liquidity is simply defined as how much of the asset (the supply) is available to those who would like to buy it ( the demand).
At various times, the liquidity of a crypto asset on an exchange may be high or low. If the demand for an asset is high on an exchange and the liquidity for that asset is low, the price for the asset on that exchange will increase. In the opposite scenario, the price for the asset will decrease.
Different crypto exchanges have varying levels of liquidity for each crypto asset. Cryptocurrency arbitrage traders exploit the difference in prices for a crypto asset due to the varying liquidity of that asset on different exchanges.
In one famous example, “The Kimchi Premium”, the price of Bitcoin was 50% higher in South Korea than other exchanges around the world. A similar scenario recently occurred in Argentina, as the value of their national currency inflated.
First, you will need to open accounts on multiple exchanges. Most exchanges will require you to complete identity verification to conform to their KYC (know-your-customer) policies.
Be prepared to submit identity documents such as your passport, driver’s license, and other sensitive information. While this is standard industry practice, you should make sure you are ok with giving this information to a third party.
Next, you will need to fund your accounts on each exchange. Most arbitrage traders keep available funds on each exchange so that they can make trades fast.
This is risky, because as we all know, keeping funds on exchanges is a less than desirable situation. However, it is a necessary evil if you want to trade fast and efficiently.
You should also be very aware of the fees each exchange charges, as well as the applicable network fees for the crypto asset you are transferring.
It is quite possible that the profit from your arbitrage trade could be eaten up by fees if you are not careful.
Also, many exchanges have withdrawal limits and minimum deposits. You should familiarize yourself with each exchange's policies.
Time is critical. If you can not execute your trade in time to profit from the price differences, you stand to not only lose the profit on the trade, but possibly incur a loss.
Slow transactions can occur for a few reasons. The network of the asset you are trading may be slow at a given time.
The processing time of an exchange for deposits and withdrawals may vary as well. In my opinion, this where the majority of the risk occurs.
To start, I would recommend focusing on one or two crypto assets. Especially if you are manually tracking your arbitrage opportunities.
Get your trading plan in place. Know up front what your stop losses will be. You can read more about this here.
You will also want to choose coins that are widely available across multiple exchanges. This will provide you with more opportunity to trade price action.
After you have gotten your feet wet, you can look for more obscure coins to compare. For an experienced arbitrage trader, there can be a lot of opportunity in lesser known, less available coins.
Consider Cryptocurrency Arbitrage "Bots"
If you want to do it right, cryptocurrency arbitrage is a full time job. You will need to constantly check the prices of the crypto you want to trade.
This, not to mention executing multiple trades, tracking withdrawals and deposits, can consume huge amounts of time and effort.
An automated trading bot or arbitrage bot can be a lifesaver. In fact, most who seriously arbitrage trade, use a bot of some kind.
A trading bot is simply a program that allows you to set a variety of parameters up front, and then executes your instructions every time the market meets those parameters.
Over time, bots have become quite sophisticated. You can track multiple crypto assets on multiple exchanges. Some support over 25 different crypto exchanges.
Most will charge you some sort of monthly subscription. But the savings in time and effort can be well worth it!
I use and recommend HAASONLINE. It is a tool that allows you to automate your trading using their built-in trading bots or one that you create yourself.
You can back-test and simulate trading scenarios to test out your strategies before committing your real funds.
Cryptocurrency Arbitrage Trading is not a trading method for beginners. Even experienced traders have a hard time staying on top of everything it takes to make it profitable.
That being said, I hope I have provided some insight into the process for you. And, if you have your mind set on arbitrage trading, I suggest you start out small and simple.
Just one, or a few coins and no more than five exchanges. As always, never invest more than you can afford to lose.
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Disclaimer: I am not an investing professional. This article is for informational purposes only and does not comprise investing advice. I am an affiliate partner of HASSONLINE and if you purchase from them using my link, I will receive a commision.