What is crypto arbitrage?
It is important to note that crypto arbitrage does not mean you can buy a BTC on one exchange and sell on the other. You can’t. This type of arbitrage, or trans-exchange arbitrage, will only occur if there is a difference in price between your pair of exchanges, such that the purchase of BTC from one exchange is worth more than the sale of BTC to another.
So, for example, if you purchased BTC on Coinbase at $53,400 and the seller on Binance wanted $52,000, you would be making the right arbitrage decision by selling the BTC on Coinbase. If there is no difference in prices, then this type of arbitrage is not applicable and thus, no position should be taken.
How does cryptocurrency arbitrage work?
Crypto arbitrage has no strict rules, with some traders having slightly more flexibility than others. However, the basic principles of crypto arbitrage will be the same for everyone.
Price Level and Commodity Ratio Crypto arbitrage traders will pay attention to the price of the cryptocurrency on the exchange they are trading. As a matter of fact, the “coupon” is what makes or breaks the entire trade, as it determines the “price differential” (how much the BTC is worth) between the cryptocurrency exchange you’re buying and the one you’re selling.
The two most common pricing levels are “low” and “high”, which are represented by the small and large brackets in the chart above. You will notice that on Coinbase, 1 BTC trades for $52,500, whereas it’s worth $53,000 on Coinbase.
Advantages and disadvantages of crypto arbitrage.
As the name suggests, the advantages of crypto arbitrage are also the disadvantages of the traditional arbitrage trade. Unlike traditional arbitrage, where one could conceivably only make an average profit of a few hundred dollars per trade, crypto arbitrage offers the possibility of extremely lucrative profits.
However, the process is more complicated and requires very advanced trading skills. There are two main kinds of crypto arbitrage trading. The first kind is buying and selling crypto assets on the same exchange. These traders are usually highly experienced, which can enhance the success rate. The second kind is trading on multiple exchanges with different set prices. This is where crypto arbitrage can be extremely lucrative, but very complicated and technical to execute.
How to invest in crypto arbitrage?
If you’re unsure of how to begin your foray into crypto arbitrage, the most viable option would be to set up a brokerage account where you can buy and sell crypto assets, such as Coinbase or Gemini.
For the price of a couple of extra dollars, you can invest in crypto arbitrage by trading the crypto assets with their respective exchanges. For example, you can buy Bitcoin on Coinbase at $53,400, buy Bitcoin on Binance for $53,400, and sell it on Coinbase for $53,700.
Although it’s impossible to take a 100% profit on every trade, in the long run, you could obtain a strong profit margin from buying low and selling high. In the best-case scenario, you could double your investment in less than six months.
The future of crypto arbitrage
With the explosion in crypto trading, liquidity in the market has increased. Most traders are on centralized exchanges such as Coinbase or Kraken, meaning there’s a limited supply of BTC and BCH on the exchanges and a demand for them.
As a result, when Bitcoin and Ethereum are extremely volatile, the demand for bitcoin, ether, and the cryptos trading at lower rates goes up as arbitrageurs try to buy bitcoin in order to sell at a lower price to collect the BTC.
Theoretically, the price that you buy your BTC at on the exchange where it is priced at a higher rate should reflect the real price of bitcoin, rather than what the arbitrageur purchased it for.
The Bitcoin arbitrage industry is growing due to the large number of transactions happening within the crypto market, and the lack of know-how for investing in crypto assets.
It does not require trading experience and is easy to carry out. In the last few weeks, numerous articles and information have been released on this subject. If you are looking to trade more frequently, you should check the following recommendations.
Recently, crypto arbitrage has been taking a new form as the business has been looking for additional market liquidity. Due to tight capital controls and wild volatility in China, many businesses are looking at the U.S. and Europe as safer trading locations.
In addition to the fact that cryptocurrency and traditional fiat are usually traded in the same markets, arbitrage allows traders to speculate on differences in prices without actually owning assets.
Due to the recent exchange withdrawals and capital controls, arbitrageurs can bet on prices going up and down without actually purchasing the asset in question.