Cryptocurrencies have grown into a mainstream phenomenon. As with virtually all types of global commodities, opportunities exist to make money but lose it as well.
Bitcoin may not be as well established as other trading assets, but it does have the advantage of being ‘open’ 24 hours a day, 365 days a year and is perhaps a little more accessible to everyday people.
Bitcoin is global and not bound by borders or national restrictions. Bitcoin and other crypto can also be found on multiple exchanges across the globe whereas traditional assets are much more limited, although generally more robust for trading purposes.
From futures trading, leverage and margin, to simply buying and holding, people entering into the cryptocurrency space are always looking for sure-fire ways to make their cryptocurrency grow, even beyond what its famed volatility will allow for.
This is where crypto arbitrage comes in. Due to the volatile nature of cryptocurrencies like Bitcoin, traders can take advantage of price discrepancies across multiple global exchanges.
Seeing as there are so many crypto exchanges and even more buyers and sellers across these markets, there will undoubtedly come a time when the price of Bitcoin is different from one market to another producing the perfect opportunity for crypto arbitrage.
So what exactly is crypto arbitrage, and is it as easy as buying low in one place and selling high somewhere else?
What is Crypto Arbitrage?
Simply put, arbitrage is when a person purchases an asset in one place and sells it in another to profit from a slight deviation in price between markets.
As an example, if 1 BTC costs $30,000 on Binance but it’s currently also trading at $30,100 on Kraken, there is a $100 opportunity for arbitrage.
In this instance, if you purchase your Bitcoin on Binance and hopefully sell it quickly enough on Kraken you’ll make a $100 profit — easy enough, right?
Unfortunately, while the mechanics are as easy as that, there is a lot more to consider before jumping fully into crypto arbitrage as a sure way to make quick profits.
How crypto arbitrage works
As explained above, crypto arbitrage is looking for the same asset selling at different prices and taking advantage of that.
There are mainly two types of crypto arbitrage: Arbitrage between exchanges and Arbitrage within the exchange.
The former is the most basic way to make crypto arbitrage work for you as different exchanges will have slightly different markets. However, with arbitrage between exchanges, some variations help you take advantage of price differences.
Once you have identified the two exchanges you want to play off each other, it is time to enact the trades to make a profit. However, one also needs to be aware of the workings that can cause issues in trying to be profitable.
It takes around 15-20 minutes for major coins to confirm the transaction. If the market price drops within this time frame, you may run a risk of generating less arbitrage profits.
Factors like geographic location, time of day, and even different news cycles can all move the price of a coin within those 15-20 minutes and destroy your hopes of being successful in an arbitrage trade.
Can crypto arbitrage be profitable?
Arbitrage is a well-known and established practice in the world of finance. It can be profitable. However, it will require dedication and persistence to succeed.
Crypto arbitrages are usually quite small. You can earn profits from market differences, from about 0.2 – 2.5% ($10 to $100) every day. If you focus on around ten such spreads every day, you could make upwards of a thousand dollars per week.
However, you need to know what you are doing, and you have to be prepared with the right tools and platforms.
If you are a day crypto trader, and there is not much market movement, you can always earn some profit from arbitrage.
If you are persistent and quick to take action on profitable opportunities, it is possible to earn a decent profit from arbitrage.
It will generally be a factor of just how much money you are able to put to work. Making 2% off of 500€ is nowhere near the same as 2% off of €1 million!
Crypto arbitrage comes down to awareness and speed. It is up to you to recognise the differences across various exchanges, and you need to access multiple listings at once, given that cryptocurrency exchanges operate 24/7/365, it can be very time-consuming.
Pros and Cons of Crypto Arbitrage
As with everything, there are certain pros and cons to crypto arbitrage, and a lot of it depends on you as a trader and what knowledge and access you have.
There are indeed a lot of pros to crypto arbitrage, but it is not as simple as it sounds and many things need to be considered before jumping in.
Pros of Crypto Arbitrage
Quick Profits
Because you can buy at one exchange and sell at another in a matter of minutes, the potential for profit in crypto arbitrage is fast. This is much quicker than traditional trading where you buy and hold cryptocurrency to sell at a later date.
A Wide Range of Opportunities
The cryptocurrency space is bursting with new markets, coins and exchanges and all of this gives rise to new potential avenues for crypto arbitrage.
According to Coindesk, there are more than 391 cryptocurrency exchanges in the world today and these will all have a slightly different price for different cryptos.
The Crypto Market is Growing
Because crypto is still very much in its infancy and has not been totally adopted or accepted, it is not a mature and steady space.
Due to this, there is quite a bit of irregularity, disjointing, and lack of information transfer between exchanges. There are also a fewer number of crypto traders than in the traditional markets, and thus less competition in the market, which leads to potential price differentials.
Cryptocurrencies are Incredibly Volatile
While volatility is often frowned upon in investing circles, it is the one aspect of crypto that makes it so enticing to risk-takers and traders.
For crypto arbitrage, it also means more opportunities as there can be huge price changes between exchanges and this makes for a more lively opportunity for bigger arbitrages.
The Cons of Crypto Arbitrage
Anti-Money Laundering Rules and Restrictions
While not really a con, and quite acceptable with crypto, using multiple exchanges will often call for you to adhere to the KYC regulations that are in place. This will involve things like potentially holding a bank account in the same country where the exchange is based
Fees
This can be quite a hidden barrier for arbitrage. Because users are operating with often small profits, any fees for trading crypto, withdrawal fees, network fees or exchange fees, can impact the profitability of arbitrage, or could even lead to a loss.
High Start-Up Capital
In order to really profit from crypto arbitrage, and make it worthwhile with the tiny profit margins there is a need for a relatively large amount of trading capital to make it worthwhile.
Withdrawal Limits
With large trades and bigger capital amounts, there also comes an issue of withdrawal limits. Exchanges can have set limits for traders which means you may not be able to get the access you want to your profits right away.
Slow Transactions
Crypto transactions are also susceptible to market volatility in terms of their speed and accessibility. When the markets are on the move, the best time for arbitrage, it is not uncommon to have slower transactions, or even downtime on exchanges which could hurt profits.
Things to Know and to Watch Out For
Understanding the pros and cons of crypto arbitrage will help you decide if this is the right option for you, but if you do decide to go down this route, there are a few more things to watch out for.
A number of pitfalls can trap unsuspecting traders.
Similar Sounding Coins
The cryptocurrency space is large and constantly expanding. New coins are being created and brought to market all the time and they can often have similar-sounding names which can trick traders.
A good example of this is the project ‘SIA’ which is an application for decentralized cloud storage solution and its symbol is very close to another project called ‘SAI’.
Even when it comes to the different coin tickers there can be issues — such as $HNC (HellenicCoin) and $HNC (Huncoin), or ($BTCS) Bitcoin Scrypt and ($BTCS) Bitcoin Silver.
Scam Coins And “Pump & Dump” Schemes
While the cryptocurrency space is certainly getting better and more regulated, there are still instances where people are being scammed out of their money.
Many coins can come to the market with the express purpose of stealing money from investors. If you arbitrage such coins, you could get burnt. The same thing happens with pump and dump schemes where projects purposefully inflate the price of their coins only to sell high and collapse the market; this can also be devastating for arbitrage.
A Lack of Trading Volume
Often when looking for arbitrage opportunities, you may be led to smaller, lesser-known coins with good potential for arbitrage.
However, these coins can also lack trading volume. This can hamper large trades of the coin and lead to serious consequences such as delisting. You could avoid running into that issue by keeping an eye on the exchange order book and making sure that you see transactions happening or not.
Is Crypto Arbitrage Worth It?
Having considered all of the above, it is time to decide if crypto arbitrage is actually worth pursuing. Certainly, it is a viable opportunity, especially in the cryptocurrency space, but what needs to be understood is that it is not a silver bullet for making easy money.
Buying a coin low, moving it across to where its price is higher, and selling it on to collect a profit sounds easy, but there are many considerations that need to be looked at.
Dealing with crypto is still challenging and often lacks an easy user interface. More than that, the lack of full regulation means there are issues surrounding scams and schemes.
Besides all of that, crypto arbitrage can be difficult to master and requires a lot of prior knowledge and experience, not to mention a decent amount of starting capital to ensure viable profits and some good coding chops if you are hoping to do it on a decent scale because if you are doing it manually, you are not going to be efficient.
Crypto arbitrage is certainly an option to make money but to be successful it requires access to capital, hard work, a tolerance for risk and a thirst for knowledge. If you’re prepared to put in the work and have some skills it could prove profitable.