Cryptocurrency arbitrage – description, types and strategies


What is cryptocurrency arbitrage

The main task of the trader is to convert their risks into profits. Many trading strategies have been developed for this, and arbitration is considered one of the most popular. This is a low-risk strategy, the profit from which primarily depends on financial literacy, reasonableness and promptness of action.

Cryptocurrency arbitrage is a type of strategic trade in digital assets that requires the sequential conclusion of a chain of logically interconnected transactions in order to instantly make a profit on the difference in exchange rate.

In arbitrage trading, there is no need to monitor market trends and the graphs of each cryptocurrency. The trader’s task is to turn the current difference in the value and sale of the asset into his profit, while he knows in advance what profit he will receive after making the transaction.

This strategy does not carry a purely market risk. Arbitrators need to consider only technical risks. For example, a malfunction of the cryptocurrency exchange or a long flow of transactions can lead to loss of profit on the intended transaction.

Arbitrage trading also requires speed of reaction. The profitability of the transaction may directly depend on how quickly the arbitrator managed to hand over the purchased asset.

An important role in the profitability of arbitrage trading is played by the correct selection of tools and reasonableness of actions. You need to consider commissions, methods of depositing and withdrawing funds, transaction speed.

Some restrictions on the methods of replenishing and withdrawing deposits from exchange accounts can create conditions with maximum benefit, but not all of them allow you to make a good deal. So, once on the Golix exchange, BTC was given $ 28,000 each for one coin, while its average cost on other exchanges varied within $ 8,000 per 1 MTC. This paradox in value is explained by the fact that it is possible to withdraw money from this trading platform exclusively to the Zimbabwe bank account, and it is completely impossible to send money abroad.

For stock trading, arbitrageurs additionally perform several important missions. With the help of such transactions, the rate of digital assets is leveled, additional liquidity is created, and the cryptocurrency market is brought to a single consensus on the value of assets.

Cryptocurrency exchange arbitrage is divided into three main types:

  • On-board arbitrage;
  • Arbitration between cryptocurrency exchanges;
  • Static arbitration.

On-board arbitrage

Intra-exchange arbitrage is carried out within the framework of one cryptocurrency exchange and consists in earning on incorrect exchange quotes. This phenomenon is possible due to the fact that the administration of the cryptocurrency exchange does not always have time to pull up the value of cryptocurrencies to the average in the market. Most often, incorrect quotes arise in cryptocurrency and fiat trading pairs.

The task of the trader in this case is to compile and execute a chain of transactions that will bring him profit. For example, make a deposit of $ 1,000 to the exchange, buy 1,428 Ripple coins for it, exchange Ripple for 142 EOS tokens, which in turn will be exchanged for 1,040 dollars. This scheme was relevant last year. The profit for the chain of transactions amounted to $ 40, while the trader did not risk anything and could calculate the income in advance.

This scheme is quite simple and the trader needs to consider only two important aspects:

  • The exchange administration will try to quickly identify and eliminate the so-called arbitrage window, so the duration of its existence can vary from several minutes to several hours;
  • Some exchanges have implemented a system for preventing intra-exchange arbitrage trading: the management of the exchange deliberately delays the execution of orders by 10-20 minutes, and this fact must be taken into account when choosing a platform for trading.

Arbitration between cryptocurrency exchanges

The classic scheme of inter-exchange arbitrage trading includes a chain of fewer transactions, but several trading floors are already involved in the process, which complicates the task of the trader. In order to make a profit, the arbitrator should:

  • Choose a platform with a low cryptocurrency rate and make a purchase;
  • Bring the purchased cryptocurrency to the exchange with a higher asset quotation;
  • Sell cryptocurrency at the exchange rate and “put” the difference in your pocket.

For example, on the EXMO exchange, an XPR token costs $ 0.7. The current Rip rate on BitFit is $ 0.74. So having bought 1000 tokens on EXMO and selling them on BitFit, the arbiter can get $ 40 in just two concluded deals.

In this case, all fees that have to be paid must be taken into account, namely the commission for depositing and withdrawing funds on exchanges and for trading transactions.

A more complex inter-exchange arbitration is also possible, which involves the separation of assets in at least two trading floors and constant monitoring of the market. Complicated inter-exchange arbitrage includes not only the difference between cryptocurrency rates on different exchanges, but also profits from over-the-counter arbitrage.

Static Arbitration

The latter type of arbitrage trading is quite complicated and will suit mainly traders with experience. The essence of static arbitrage lies in the difference in value between correlating cryptocurrencies. For example, Bitcoin and Litecoin are correlated, that is, statically interconnected, and when the value of one asset rises, the rate of the other, as a rule, decreases.
For example, when the Bitcoin exchange rate with respect to Litecoin drops sharply, then experienced traders buy MTC at the lowest price, and then sell it on the exchange at a higher cost.

Often the difference between the correlating pairs is not too high and just covers the costs of trading commissions, but there are also situations when a sufficiently significant exchange rate difference occurs. In this method, the most important thing is to accurately determine the moment the trend changes.

Advantages and disadvantages of cryptocurrency arbitrage

Among all the advantages of arbitrage trading, several main ones can be distinguished:
  • Speed. The arbitrageur receives his profit immediately after the completion of the logical chain of actions. Ordinary traders have to figure out market situations, buy assets and wait until the market situation changes.
  • Minimal risks. When trading on this strategy, the trader can determine his income even before the transaction, while others have to rely on forecasts and commercial flair. According to experts, in the worst case, for unsuccessful arbitration transactions, you can lose about 10% of the invested funds and this is significantly less than for other trading strategies.
  • Ease. An arbitrage strategy is suitable for both beginners and experienced traders. In this case, you may not even have in-depth knowledge of the market, not be able to calculate glasses and place orders. It is enough just to timely reveal the arbitration window and seize the moment. Absent in principle, and the financial threshold of entry. You can start trading with minimal investment and gradually increase your trading capacity.

Arbitrage transactions are considered one of the most low-risk. The trader’s task is only to properly manage their finances, calculate the real profit from transactions and do not forget to include all associated commission costs in the calculations in order to calculate the net profit from the chain of transactions. But here it was not without flaws. These include:

  •  Labor input. No matter how simple the strategy sounds, in reality it involves a huge number of related actions. A trader needs to choose the right tools, constantly monitor quotes on various exchanges, quickly calculate the profitability of transactions and constantly transfer money and assets among themselves.
  • Start-up capital. You can start arbitrage trading with minimal amounts, but profit on transactions directly depends on what the volume of the transaction was.
  • Limitations Often, there are some limitations to the attractive value of cryptocurrency on a particular trading platform. For example, a coin is sold much cheaper, but there are only a few dozen left and it won’t bring high profits, or the exchange has inconvenient ways to deposit and withdraw funds that will not allow you to sell it profitably on another platform.

How to start arbitrage trading

Start arbitrage trading should be the choice of trading platforms. When choosing cryptocurrency exchanges, it is important to pay attention to the following parameters:

  • Complexity of verification;
  • Limits and methods of depositing and withdrawing funds;
  • Daily trading limit;
  • Platform commissions;
  • Order processing systems on exchanges.

The trading platform should be convenient and easy to use, satisfy all the requirements of the trader. The first step is to register on each of the exchanges, which will be involved and, if necessary, the verification process, too.

The next step is to choose cryptocurrency assets for which arbitrage trading is possible. Arbitrage windows tend to close quickly, so it’s important to consider the transaction speed and network fees for instant transactions. For example, transferring funds to Bitcoin is not recommended, since the network is heavily loaded, and for an instant transaction you will have to give all the profit on the transaction.

Before embarking on actual trading, you need to carefully consider all technical issues, determine the tools and trading capital.

Cryptocurrency Arbitration Bot

Arbitrage trading is a rather tedious process that requires constant miscalculations and monitoring of quotes at various trading floors. Beginning arbitrageurs can spend from 8 to 9 hours a day in trading. Automation can be simplified by its automation using special software.

The arbitrage trading bot must meet the following basic requirements:

  • Work with all cryptocurrency exchanges;
  • Contain a scanner for analytical and predictive calculation of the transaction;
  • Conduct round-the-clock monitoring of the market and independently open and close transactions when the conditions of profitability are met.

Advanced versions are able to independently calculate profitability, open and close deals. In them you can set the parameters by which operations will be carried out automatically. All this greatly simplifies trading, but it is worthwhile to understand that bots are paid. A quality program costs $ 15 a month or more.

Tips for a beginner arbitrageur

Arbitrage trading, as well as trading in general, requires a detailed miscalculation and is not compatible with touch-sensitive actions. It is important to remember that each chain of transactions needs to be calculated in detail, no matter how profitable it may seem at first glance.

Also, for successful trading, you should follow a few simple rules:

  •  It is necessary to choose cryptocurrency assets with a high transaction speed through the system in order to eliminate the risks of transaction disruption.
  • It is necessary to study in detail several selected trading platforms. It is important to consider all fees, transfer methods and features of the algorithm of each exchange. According to experienced traders, taking into account the deduction of all commissions, the net profit from the transaction should be at least 3%.
  • Calculate the difference in the exchange rate and enter into transactions only with a profitability of more than 8%, because all commission fees will be about 5% and this threshold is necessary in order to reach the recommended profitability of the transaction.
  • Build up trading capital. For initial trading, it will be enough to have $ 100, which can be put into circulation, but for some time it is recommended to direct the profit to increase capital for trading, because the larger the volume of the transaction, the more profit the arbitrageur receives.
  • You should learn how to identify beneficial points. As a rule, profitable purchase is carried out when the market is calm, and sale – when the hype begins. To do this, the trader needs to keep track of the latest cryptocurrency market news, which will indicate the moments when certain resonant events can change the main trends.



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