Cryptocurrency Arbitrage Trading and Software to Use [The Ultimate Guide]
With the high price volatility cryptocurrencies experienced over the last year, exchanges can often have significant price differences between them. And that’s a gold mine for us – crypto enthusiasts. So, in this post, we explain how to earn on these differences, what is cryptocurrency arbitrage trading, and what arbitrage software you can use to automate this.
Arbitrage trading allows one to use those price differences to his advantage, purchasing a certain cryptocurrency on an exchange where the price is low, subsequently selling it in on another exchange where the price is higher.
While this may sound like a walk in the park, there are a few risks and tips that need to be considered before you start this trading practice.
What is cryptocurrency arbitrage?
Arbitrage trading is the concurrent purchase and sale of a certain asset on different markets to earn profit from the price gap between those markets.
This trading method is now also being applied to cryptocurrency. To give an example of how arbitrage trading works, one would search for a certain coin that is cheaper on Exchange A and sell it for a higher price on Exchange B, making a small profit from the trade.
Arbitrage trading has existed for many years. Especially in the stock, bond and foreign exchange markets it is a very common practice. These markets, however, as well as the systems used to discover arbitrage opportunities is not openly available to most retail traders.
With the rise of cryptocurrency, arbitrage opportunities are readily available for everyone, especially in this period of time, where inefficiencies between exchanges and very volatile trading volumes occur daily.
How does cryptocurrency arbitrage work?
Arbitrage works by the small price differences between markets. This happens because large exchanges, which can handle large trading volumes and are able to handle liquidity demands, often have cheaper prices. On the other hand, smaller exchanges with a smaller supply of a particular coin, will display a higher price. By buying from the large exchange and immediately selling to the smaller exchange, traders can profit from the price difference.
Arbitrage opportunities, however, also exist the other way around, where one purchases from a small exchange and sells on a larger one. The recent “bull market” caused an impressive increase in trading volumes on many exchanges worldwide. Those exchanges are not connected in any way, which often delays the average price adjustments. As a result, price differences occur and arbitrage traders use the opportunity to profit.
A famous example, which had the world buzzing in January, was the price difference in South Korean exchanges where the price of Bitcoin was more than 50% higher than global prices.
How to do crypto arbitrage trading
Most beginners start by exploring everything manually. Monitor different exchange prices manually by using an app such as Blockfolio, which shows multiple exchange prices in real time. Then, place your trades carefully and transfer funds swiftly.
There are many methods with which arbitrage traders can make profit, including the following:
- Simple arbitrage. The purchase and immediate sale of certain coin on different cryptocurrency exchanges.
- Triangular arbitrage. With this strategy one takes advantage of the price gap between three different currencies. For example, purchase ETH in USD, sell it to make GBP and then exchange GBP back to USD.
- Convergence arbitrage. This method requires one to buy a coin on one exchange where it is seen as undervalued and subsequently selling the same coin on an exchange where it is seen as overvalued (refer to our trading article to see how to do this). When the two prices meet in the middle, you can profit from the amount of convergence.
Cryptocurrency Arbitrage Software
Lately, however, sophisticated software has been introduced to the process of arbitrage trading, making arbitrage much easier and in most cases, automated.
Arbitrage Bots are easy to use and a lot of them also come in a basic version which is free. Currently, according to Railsonwave, the best options are limited:
Gimmer. One of the most popular Arbitrage bots is Gimmer. The bot offers a free basic version to get you accustomed and rentable premium options by paying GMR tokens, the tokens that fuel the ecosystem of Gimmer. These can be purchased directly from the website or on the exchanges where the token is already listed.
Gimmer also has a very comprehensive tutorial page as to how to set up your bot and connect it to your accounts.
Cryptomedics Arbitrage Bot. The CryptoMedics Arbitrage Bot is a bot which send you notification about arbitrage trading opportunities.The bot informs you every 15 minutes and posts the best 5 arbitrage opportunities which are available for at least 10 minutes.
Exchanges which the bot supports are: Binance, Cryptopia, Bittrex and Kucoin.
The profit which the bot shows includes the transaction fees, but excludes withdrawal/deposit fees.
The arbitrage bot also has a free Telegram channel which gives you the latest trading opportunities.
The cost to acquire the full spectrum of arbitrage opportunities is 0.06 BTC.
The potential benefits of arbitrage
Why should one experiment with cryptocurrency arbitrage? There are a few reasons:
- It can turn a (potential) profit very fast. You can complete an arbitrage trade as fast as it takes to make a normal trade. While a bit riskier, this offers the opportunity to earn profit much faster than holding cryptocurrency for the long term.
- Everyday more exchanges are created. According to Coinmarketcap there are more that 180 exchanges spread all over the world. With the proper setup, it shouldn’t be hard to spot price differences.
- Crypto markets are still very new. Trading cryptocurrency is largely unregulated and risky, and the average prices take a long time to be communicated between exchanges. There are also less traders compared to other investment markets, which is another reason one should look for arbitrage opportunities.
- Cryptocurrencies are volatile. And where volatility is often seen, there’s the potential for price gaps between different exchanges.
The risks of cryptocurrency arbitrage
Theoretically speaking, cryptocurrency arbitrage sounds quite easy, yet not everyone is doing it. This is because there are several risks one needs to consider when undertaking this trading method:
- KYC regulations. Know Your Customer (KYC) regulations have been more and more prevalent in the cryptocurrency world. These regulations can lead to several drawbacks when one wants to perform arbitrage trading. For example, you may need to verify your exchange account to perform trades, or you may need to have a bank account of the residence country of your chosen exchange.
- Store your coins on exchanges. To perform arbitrage trades and any frequent trades, you will need to store your cryptocurrency on an exchange. This, in and of itself, is quite risky, given the rich history of hacks and theft of coins that happened in several exchanges.
- Exchange fees. Most crypto exchanges will ask for fees everytime you deposit, withdraw or trade cryptocurrencies. When calculating the profitability of a trade, you will need to calculate those costs in.
- Large trading quantity. In order to see a relatively meaningful return on your trade, you will often need to buy and sell large quantities of a certain coin, taken into account the processing delays and the fees that accompany them.
- Failing to execute in time. One of the biggest arbitrage risks is that the market might move against you or a trade may happen before you can complete your sell trade. Due to the high volatility, cryptocurrency prices could rapidly move against you in the time it takes to move funds between exchanges.
Things to consider before attempting cryptocurrency arbitrage
After you have thoroughly understood how arbitrage trading works and you are aware of the risks involved, keep the following tips in mind when getting started:
- Look for new listings. Keep track of the most popular cryptocurrency forums and news sites for new listing announcements. If a coin has recently been added to an exchange, and there’s a somewhat limited demand for the coin on that exchange, you may be able to find a larger price gap.
- Have a concrete plan of action. There are several things you need to consider and ask yourself before taking action. For example, what is the financial risk of your trade? Will the price difference result in a potential profit that reflects the risk? How much cryptocurrency do you want to keep on exchanges and will this be necessary?
- Only use trustworthy exchanges. Always choose reputable exchanges that offer transparent and fast customer service. Avoid shady exchanges with too small trading volumes.
- Observe the market sentiment. There is more opportunity to spot price differences during periods of high volatility, so monitor crypto markets for announcements, news and recent developments that could spike or deflate the price.
- Diversify your assets / Diversify your risk. Placing your money into only one cryptocurrency or exchange is risky. Using multiple assets and exchanges can help limit risk.
Ready to start cryptocurrency arbitrage trading?
It’s time – you gotta go and test this for yourself.
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For more awesome ways to earn with cryptocurrencies visit this ultimate list of ways to earn crypto.
Happy crypto hunting!