By now, most people interested in cryptocurrency know all about trading and the various crypto exchange platforms. However, it is usually only the real enthusiasts who know about crypto arbitrage, another form of trading.
Crypto arbitrage can be a great approach to trading. It is a good option for those who want to make some extra cryptocurrency to spend on crypto gambling at the best crypto casino. But as with everything, it comes with some negatives too.
This article tells you all you need to know about crypto arbitrage, so you can decide if it’s worthwhile to try out.
What Is Crypto Arbitrage?
Crypto arbitrage is a variation of trading that takes advantage of the fact that different exchanges have different prices for cryptocurrencies. A currency like bitcoin will be bought on one exchange and sold on another to generate a profit. It is bought for a lower price on the initial exchange and then sold at a higher price on the second.
How Does it Work? (How Can You Make Money With It?)
Let’s dig a bit deeper. There are a good number of exchanges that exist globally. These exchanges offer various crypto services such as wallets, for example. However, people commonly use these exchanges for trading; that is their main purpose. An important thing about these exchanges is that they all list cryptocurrencies at different prices. This makes them perfect for arbitrage.
Traders essentially manipulate the system and exploit these different price points for profit. For example, Exchange A may list Bitcoin for $17,000 while Exchange B simultaneously lists it for $17,500. An arbitrage trader would come in and purchase BTC on Exchange A and then immediately sell it on Exchange B. This brings them an easy profit of $500.
While that seems very simple, it is not that straightforward. If it was that easy, everyone would be doing it, wouldn’t they?
Well, there is a reason for that. Crypto arbitrage used to be much simpler when cryptocurrency was just starting. This is because the fluctuation of prices would be extremely significant from one exchange to the next.
These days, the price gaps are not that dramatic at all, so making a good profit can be difficult. And, if a good price gap does appear, you have to act at the speed of light because it may only last for a few seconds.
Types Of Arbitrage
There are various types of crypto arbitrage for you to choose from. Many think the only approach is transferring cryptocurrencies from one exchange to another, which is incorrect. Below are the different types of crypto arbitrage.
Spatial arbitrage is what we have been discussing thus far. You buy crypto at one exchange and sell it on another. You must act extremely quickly when price gaps appear, and you may struggle to do this.
For this variation of arbitrage, you should also consider that you will incur transfer fees and that transfers may be slow. The speed of the transfer is important because you would need to make the transfer before the price gap changes.
Spatial Arbitrage #2 (No Transfers Between Exchanges)
This approach to arbitrage removes the step of transferring crypto from one exchange to another. This means you can save on transfer costs and won’t have to act as fast because the time for transfer doesn’t need to be considered. These factors make this the superior option to the normal type of spatial arbitrage.
Here’s how this variation works. First, you need to have a balance on two separate exchanges. Then you have to put a buy and sell order in place on both exchanges simultaneously.
For example, you see a spread on the BTC-USD market while selling on Exchange A and buying on Exchange B. This means you would move your BTC to Exchange B and your USD to Exchange A and wait for a good spread. When a big difference appears, you buy BTC with your USD on one exchange and sell BTC for the other.
This is a fairly complex way of doing it, and you have to keep your eye on the price differences, but once you figure it out, you will make a profit. There will be no transfer fees here, but it can be tough to have exchanges running in two places simultaneously.
This variation of arbitrage occurs on one exchange alone. Rather than taking advantage of the varying prices across the various exchanges, this option requires you to use the differences in trade pairs on the market on any given exchange.
For instance, let’s say you are sitting with some ETH. By looking at the differences in prices, you could profit by trading to different cryptocurrencies and then back to your original currency. Like trading ETH for BTC, then exchanging the BTC for XRP, and from there, you trade back to ETH. If the price differences work in your favour, you’ll end up with a profit.
The advantages of this option are that you can make your profit without using different exchange platforms simultaneously, see the profit instantaneously, and not incur transfer fees. However, if you submit too many orders at once, somebody else may fulfil it before you get a chance to do it, and you won’t get your desired price.
This is the most complex variation of arbitrage. In addition, it is extremely risky. You need to be fast and understand the mathematical modelling based on which the type of trading is based. Arbitrage traders who use this method often use bots and algorithms to assist them.
Pros and Cons Of Crypto Arbitrage
Before you commit to crypto arbitrage, you should consider the pros and cons of each so that you know what you are getting yourself into. For your convenience, we will discuss them here.
Pro: While it’s clear that you won’t just have the cryptocurrency fall into your lap with crypto arbitrage, it is a decent method to make some money on the side without putting in too much effort. You can make a generally fast profit, much more than you can say for other income streams.
Lots Of Opportunities
Pro: There are so many different exchanges. This means there are tons of crypto arbitrage opportunities. If it doesn’t work using one exchange, you could try a less popular one, for example.
Crypto Is Still New
Pro: Various advantages come with a sector that is still developing. There is not a mass of competition, the prices are still volatile, and there is still some irregularity. While none of these sounds like advantages, they are. That is because they all cause prices to fluctuate, which means you can take advantage of it for your arbitrage.
Con: Your profits are not likely to be very high, even though you will put your time, effort, and money into this. Make sure you’re willing to do that for a relatively small profit.
Con: Crypto trading never sleeps. This means you may miss some great price differences while asleep. As such, serious arbitrage traders invest in bots to ensure they don’t miss out, even if they are not present for the price fluctuations. As such, you may not be very successful without this infrastructure, and it can be expensive to get your hands on.
Con: This type of trading is generally only profitable if you invest a large amount of money. In addition, you will have to pay transaction fees, exchange rates, and more. For casual investors, this might not be a realistic option.
Is It Legal?
So, now that you know the pros and cons of crypto arbitrage, you may have some more questions. The most common question is whether or not it is legal. Well, the answer is yes. It is 100% legal. However, there are various ways to ensure that you stay in line with the law.
For example, there are regulatory factors that you always need to take into consideration. This is specifically for traders who are participating in cross-border arbitrage. Different jurisdictions will have different AML and KYC compliances.
For some, crypto arbitrage might sound like the perfect way to earn profits on top-rated gambling games. For others, however, it may seem like too much effort for insufficient reward and a little bit too risky. Of course, the choice is yours.
Either way, ensure you’ve researched and know the arbitrage methods well before getting started.