What is crypto arbitrage?
The basic principles of crypto arbitrage are simple: You buy a cryptocurrency on an exchange that offers the lowest price when you immediately try to sell it on another exchange. These are arbitrage transactions between exchanges and the main purpose is to profit from price differences.
The same has long been true of the stock market. However, the arbitrage opportunities there are not very good, as the bid/ask spread on conventional markets and trading pairs is small compared to what you see in the order books of crypto markets like Ethereum (ETH) or EOS.
How does cryptocurrency arbitrage work?
A simple arbitrage strategy works by setting up multiple accounts on a crypto currency exchange with a higher price and another crypto currency exchange with a lower price. This allows a crypto trader to exploit the inefficiencies of the market for profit without much risk to the market. This is a well-known business strategy that works as long as the commission per transaction is not too high.
To make the strategy work without manually calculating and executing trades, a crypto arbitrage trader can develop a crypto trading bot that places trades for you when trading platforms offer different price quotes for the same asset. As the market evolves and matures, there are more and more opportunities to create arbitrage bots for the better cryptocurrencies. Bitcoin arbitrage, for example, often does not generate enough potential profit to justify the transaction and trading costs. Therefore, it is important to find a crypto-currency exchange that allows simple statistical arbitrage for at least one crypto asset at a time, either by placing trades manually or by using a crypto arbitrage bot.
Why is cryptocurrency arbitrage so popular?
Since the cryptocurrency market is still relatively new and transferring assets from one exchange to another and placing quick buy and sell orders is relatively easy, many traders and even hedge funds use arbitrage trading as a great way to increase investment wealth. It is also a great way for cryptocurrency exchanges to generate additional fees, as arbitrage trading involves many transactions in a short period of time.
Also, because there are cryptocurrency exchanges that have reasons to offer a lower or higher buy or sell price, such as the cryptocurrency exchanges in the US, it is relatively easy to take advantage of the price difference if you have the capital to do so. Note, however, that it is not very useful to move capital between two exchanges unless you have, say, 1 BTC to trade. This is because the transmission of cryptographic information between exchanges involves additional transmission costs.
So, if you have a good understanding of the crypto-currency market and crypto-currency trading – and a few coins in your stash, it’s a good way to make money as prices vary between different exchanges and different markets.
As long as buy and sell orders are executed as quickly as possible, a sudden market movement can wipe out potential gains.
Is arbitrage in cryptocurrencies profitable?
Due to the high volatility and high volume of transactions, the divergence between the changes allows the cryptoarbitrageur to always find opportunities. Therefore, crypto currency arbitrage is always profitable and offers a great way to increase your crypto holdings. Bitcoin arbitrage is becoming increasingly difficult, however, as traders scan the market and create crypto-bots that quickly minimize any potential profit opportunity.
Cross-border arbitrage is still a good way to get a good edge in the market. Although more complex mechanisms are required to convert money into currency, the price difference between cryptocurrencies is still significant enough to justify the effort.
Pros and cons of arbitrage in cryptocurrencies
The main advantages of crypto arbitrage are the profit opportunities without much risk to the market, because buy and sell orders are executed simultaneously. With automation tools, traders don’t even have to look for manual options. However, the disadvantage can be caused by sudden price increases, as well as increased transfer costs from one exchange to another. This has already happened to bitcoin traders during extreme network congestion, meaning that any arbitrage profits are limited by the fact that the cryptocurrencies must then be moved to other exchanges or portfolios.
How to calculate costs and profits of crypto arbitrage
The calculation of the costs and benefits of the arbitration option is relatively straightforward. You must deduct the cost of the factory dummy from the acquisition cost of the factory. For example, if you sell 1 BTC for $60,000 on one exchange and buy 1 BTC on another exchange for $59,500, your profit is the difference of $500. You must also deduct from this profit the trading commissions on positions bought and sold. After that, all that’s left is your profit.
What are the best crypto currency arbitrage tools?
Since the beginning of cryptocurrency trading, buying and selling coins on different arbitrage exchanges has accelerated the development of different arbitrage trading and monitoring tools.
Let’s take a look at some of the best currently available:
Bitsgap, launched in February 2018, is an example of a cross-exchange platform that automatically places trades on different exchanges. This allows you to manage your assets on multiple exchanges with a single application and benefit from the price differences between markets.
It is considered one of the pioneers in cryptocurrency arbitrage and has a well-developed exchange API solution. It helps you place orders and make trades while easily tracking your coin portfolio and prices.
They also offer a trading robot and signal service that can help you automate your trading by placing market orders or limit orders directly into the market. As they claim, their algorithm automatically determines the best trading opportunities on multiple exchanges. Simply connect your existing share accounts to the platform.
They also offer a free trial that allows you to use the standard features with a transaction limit of $1,000 per month. Prices are broken down into different levels, with different tools and features unlocked as you progress through the subscription.
Cryptohopper is another easy-to-use arbitrage tool that can help traders with different experience levels and crypto holdings to try automated crypto trading and track crypto prices easily.
They have official partnerships with several major exchanges like HitBTC, OKEX, KuCoin and offer cheap prices for their products. The first 20 trades or positions are free, after that the price of membership is mainly based on the volume of trades and the number of coins you choose to trade. Higher level membership provides additional features such as algorithm analysis, market making and arbitrage.
They also offer a wide range of resources that you can use to get familiar with their platform. Your Getting Started with Cryptohopper program is ideal for new traders who have no experience with arbitrage tools. Then you can read the detailed documentation on how to use the platform more efficiently.
Moreover, their social trading platform allows the exchange of new strategies and their optimization in an internal chat room. You are encouraged to try out different bot models, which is a great resource for newbies.
Overall, this platform is good for beginners.
Gimmer offers an automated crypto trading solution and a Discord group that helps build a community of crypto traders. The platform works on Windows, OSX, Linux and others, which is a great option for crypto traders who use multiple operating systems.
The main features are similar to those of the others. However, Gimmer offers free backtesting for the past trading period, as well as the creation of a free trader bot with an indicator and a crypto-currency. This is a great opportunity to try out both their offer and the paid version. Membership can be purchased with Gimmer Tokens (GMR). It offers even more solutions and features, such as. B. include an automated bot for borrowing cryptocurrencies, a social trading network, a portfolio of trading strategies, and a simulator.
They also offer tutorials on how to use their crypto arbitrage tool to help you navigate crypto arbitrage trading and take full advantage of their platform.
Why is there an arbitration option?
The basic principles are simple: inconsistencies between exchanges exist and always have existed. So if you buy $10,000 worth of BTC and sell BTC on different exchanges, and the exchange rate is lower on the exchange where you bought the BTC and higher on the exchange where you sold them, you can keep the difference as profit. This profit is called the arbitrage spread.
You can also work with more advanced methods such as triangle arbitration, which we will discuss later. The basic principle is the same: you go through the order book and place a buy order on an exchange that offers a lower price and a sell order on an exchange that offers a higher price.
In the cryptocurrency markets, this is especially beneficial because some exchanges have suboptimal prices. This may be because one stock exchange must comply with different rules in different regions while the other does not. As a result, the incremental value of and demand for BTC may be higher than normal, for example.
What are the types of arbitration available?
There are several types of arbitrage options for crypto-currencies – the most popular are spatial arbitrage (with or without rollover between exchanges) and triangular arbitrage. Let’s take a closer look at each of them.
Arbitration with conversion between exchanges
This is the simplest form of arbitrage because you buy, say, 1 BTC on an exchange, transfer it to another exchange and sell it there at a higher price.
But since moving BTC between different exchanges takes time and incurs additional transfer costs, the difference or spread is probably not large enough to justify the risk of a sudden price movement.
Arbitration without transfer between exchanges
This arbitrage approach requires no transfer of cryptographic data between exchanges and allows for immediate response to price differences. All you have to do is hold assets on both exchanges and simultaneously place a buy and sell order if the price difference is large enough.
Example: You buy 1 BTC on Coinbase Pro for $10,000 and sell 1 BTC you already had on Binance for $10,100. The difference between the price of $10,000 and $10,100 is your profit.
Such spreads still exist in the cryptocurrency markets as transaction costs continue to decrease; however, the price differential tends to decrease. As more and more traders use cryptocurrency arbitrage and compete effectively, the market prices of cryptocurrencies like BTC are getting closer to perfection.
Triangular reference axis
Arbitrating triangles requires more calculations, but that’s why many crypto currency arbitrage tools automate this for you. The basic principle is to choose three cryptocurrency pairs on the same exchange, such as. B. ETH/BTC, XRP/BTC and XRP/ETH. You then exchange ETH for BTC, BTC for XRP, and return to your starting point by exchanging XRP for ETH.
However, there should be a significant price difference between the three pairs, which is usually not the case on the major exchanges and is usually observed during periods of increased volatility. In such market conditions, your orders may not be executed at the price you requested. Therefore, one should be careful because crypto-currency exchanges always carry additional transaction and transfer fees, as well as slippage.
In general, there are some excellent crypto arbitrage tools that allow you to take advantage of price imperfections. They offer automatic placement of trades without the need to switch between foreign exchange accounts to take advantage of existing arbitrage opportunities.
There is no one best crypto arbitrage tool; however, the ones listed above are a great way to speculate between exchanges with a simple app.
Since the cryptocurrency markets and the crypto space as a whole are relatively new, it is likely that cryptocurrency arbitrage will continue to evolve. So it’s worth looking at them all and deciding which one is best for you.
frequently asked questions
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