Crypto Arbitrage – How It Works & Best Trading Platforms

If you’ve already bought into the cryptocurrency trend, what’s next? How do you manage your digital assets in this new crypto world? Like in traditional stock or money markets, trading in cryptocurrencies can best be done with winning strategies like crypto arbitrage. 

Here are some tips on making money from your investment through crypto arbitrage.

What is Crypto Arbitrage?

Crypto arbitrage refers to a trading strategy where a cryptocurrency investor buys crypto on one exchange before selling it on another. The crypto market is highly volatile, offering better arbitrage opportunities than other financial markets. 

Since cryptos are traded globally across different exchanges, arbitrage traders capitalize on a scenario where a coin trades at a lower price on one exchange than another. The trader must find a price difference across two or more exchanges and carry out several transactions to benefit from the difference. 

For instance, if the current price of Bitcoin is $47,000 on Binance and the price on Kraken is $47,200, an arbitrage trader will buy Bitcoin on Binance and sell it on Kraken to make a profit of $200. This doesn’t include trading fees, and, therefore, arbitrage traders should be careful as the exchange fees and transaction costs may eat into their profit.

What Types of Crypto Arbitrage Exist?

Arbitrage trades can be categorized into:

Spatial Arbitrage

Spatial arbitrage is the basic form of arbitrage trading. It involves buying crypto on one exchange before immediately selling it on another. While this is a simple strategy, it exposes a trader to certain risks such as transfer costs and timing. 

Convergence Arbitrage

In convergence arbitrage trading, a trader buys a coin on one exchange and sells it on another exchange. The main objective is to see a convergence of the two prices when the trader closes positions. 

The goal is to avoid the transfer fees by going long on a coin on one exchange and going short on the same coin but on another exchange. The trader then waits for the price between the two exchanges to converge.

Triangular Arbitrage

Triangular arbitrage trading is usually more complicated as it involves trading more than a pair. It takes advantage of the price difference in more than one pair in one exchange. 

This strategy requires the investor to start with one cryptocurrency before trading it for another undervalued one compared to the former. The whole transaction occurs on the same exchange.

The trader will then trade the second crypto for the third crypto that is more overvalued than the second. Finally, the investor will trade the third crypto for the first crypto to complete the circuit.

Why is Cryptocurrency Arbitrage a Low-Risk Strategy?

One of the benefits of crypto arbitrage trading is that it doesn’t require traders to predict the future. Neither do traders need to enter trades that may take many hours before they can generate a profit. They need to find arbitrage opportunities and take advantage of them.

Man Investing MSN computer working stock market
Image Credit: iwatchwater/Depositphotos.

Arbitrage traders can expect a fixed profit without analyzing the market or using other price predictive strategies. Depending on the resources available, traders can enter and exit an arbitrage trade in a few seconds or minutes. Therefore, the key reasons why arbitrage trading is a low risk are:

  • No predictive analysis is needed.
  • Arbitrage traders only need to execute trades lasting for a maximum of a minute, reducing the trading risk significantly.

Take note that there are still risks of arbitrage trading. While they take lower risks than active cryptocurrency traders, they still risk losing money.

How to Find Crypto Arbitrage Opportunities?

When looking for good arbitrage trading, there are several factors you need to consider. These are:

  • Volume. If a cryptocurrency has a high trading volume, it will have higher liquidity and increase your trade’s chances of being executed with little or no slippages. 
  • Fees. As we have already noted, fees are a crucial factor affecting potential profits, and this is why you need to find an exchange with low fees.
  • Avoid slippage. When there is a difference between the price of the expected entry and the exit from trade, this is known as price slippage. To avoid a higher slippage, traders should conduct a lot of research and search for the right timing.

What Are the Risks of Crypto Arbitrage?

Several factors reduce your chances of making a profit in crypto arbitrage. Since they have a low risk, their profit is also low. To generate a considerable profit, a crypto arbitrageur should trade in high volumes, and this is on top of the fact that arbitrage trades have a small cost.

Fees

Remember that in arbitrage trading, you will be trading across two different exchanges, and therefore, you will be charged deposit, withdrawal, and trading fees. When these fees accumulate, they will affect your profits.

Selecting an exchange with competitive rates is advisable to reduce the losses brought on by the exorbitant fees. You may also deposit funds on different exchanges to benefit from market differences.

Timing

Arbitrage trading is usually time-sensitive. Since many traders try to capitalize on specific arbitrage opportunities, the price difference between two exchanges disappears fast. Executing a crypto arbitrage may be affected by several factors, such as:

  • The blockchain’s transaction speed. Since you will be executing transactions between different exchanges, the trading efficiency will be affected. Therefore, arbitrageurs, or arbitrage dealers, should stick to those high transaction speed blockchains or those with no traffic congestion. 
  • Exchange AML checks. Many exchanges have anti-money laundering checks when traders move large amounts of money, which can last for months. Therefore, you need to consider the probability of the exchange imposing extra checks at the withdrawal point before making the cross-exchange arbitrage trade.
  • Offline exchange server. There are instances when crypto exchanges may experience outages. Others may limit deposits and withdrawals of specific crypto assets, affecting your ability to profit from crypto arbitrage. 

Security

As an arbitrage trader, you should deposit many funds in an exchange’s wallet. However, this may result in risks associated with hacks and exit scams. Exit scams happen when an exchange suddenly stops operations and disappears with depositors’ funds. 

Therefore, you must do due diligence and stick to reputable crypto exchanges.

How To Start Arbitrage Trading

So many cryptos on many exchanges can make it hard to find arbitrage trading opportunities. 

Fortunately, some platforms provide users with a tool that helps them to find automated arbitrage strategies before executing them in different crypto exchanges. These offer an excellent opportunity to make a passive income

Another option is to do arbitrage trading of non-popular cryptocurrencies. There are many cryptocurrencies with a big price spread, and these are usually the less popular and less frequently traded coins. However, these have bigger price fluctuations, so investors should be careful. This volatility has pros and cons, but it also increases the level of risk in crypto arbitrage.

Traders can also download various apps to track the price of cryptocurrencies and do arbitrage trading. These apps use algorithms that automatically search for arbitrage between different crypto exchanges. With this automation, arbitrage traders can benefit from different price discrepancies.

Best Platforms For Crypto Arbitrage

Here are some platforms you need to consider for your crypto arbitrage:

Arbismart 

The crypto trading tool on Arbismart features an intelligent trading bot that enables users to take advantage of price fluctuations between different exchanges. The software checks for arbitrage opportunities in 35 exchanges and finds the best deals possible. 

Like the crypto market, it works 24/7 and reacts fast to developments in the market.

The platform has returns of up to 45% per annum, depending on the size of your investment. Arbismart can execute hundreds of trades in different markets and exchanges with high speed, efficiency, and power.

Pionex

Another great trading bot for cryptocurrencies is Pionex. It is an excellent tool with over 120 coins and less than 0.05% trading fees. 

Furthermore, it has deep liquidity that ensures all orders are filled quickly.

Coinrule

Coinrule is another great crypto arbitrage bot that can help you automate your trades easily. Getting started with them is free, and they work with the ten best exchanges. 

They will also enable you to see historical trends to determine the trades that performed well and those that didn’t.

Bitsgap

This excellent arbitrage platform enables you to manage your crypto assets in a single interface. The platform will assist you with intelligent algorithmic orders. 

The terminal shows you the real-time performance of your coins.

Binance P2P

The Binance P2P offers an opportunity to do peer-to-peer (P2P) trading. Users can find sellers selling at a low price before selling to a different user who will buy high. 

Since you complete the whole process on Binance, you can avoid the risk of transfer fees and time.

Want To Get Free Crypto?

Starting with crypto arbitrage is a lot more fun when you have free crypto to start with. Here are platforms where you can get free cryptocurrencies to get started:

ExchangeBonusRequirementsSign Up
Crypto.Com Logo Stock$25 in Crypto.com Coin (CRO)Must use our link, open an account with referral code usmefwh2jp, and stake CROGet FREE Crypto!
SoFi Logo Stock$5 in Free CryptocurrencyMust use our link and open SoFi Invest Android or SoFi Invest iOs account, then redeem a $5 bonus to a new SoFi Crypto accountGet FREE Crypto - Android

Get FREE Crypto - iOs
Celsius Logo Stock$50 in Free BitcoinMust use our link and deposit at least $400 of crypto within 30 daysGet FREE Crypto!
Nexo Logo Stock$25 in Free BitcoinMust use our link and buy at least $100 of crypto within 30 daysGet FREE Crypto!
Gemini Logo Stock$10 in Free BitcoinMust use our link and buy at least $100 of crypto within 30 daysGet FREE Crypto!
Coinbase Logo Stock$10 in Free BitcoinMust use our link and buy at least $100 of crypto within 30 daysGet FREE Crypto!

Conclusion – Crypto Arbitrage

A key element in crypto arbitrage is time. You only have a small window of opportunity to buy small and sell big from different exchanges. So while it is said that this strategy is low-risk, it holds an appeal to the risk-taker because of the quick decision called for by the immediacy of the transaction. 

So, if you have the nerve to take calculated, informed risks, crypto arbitrage is for you. These basic guidelines are just for starters; continue reading to find or refine your ideal cryptocurrency investment strategy.