Arbitrage trading is one of the most exciting ways to make money in crypto. While it didn't necessarily originate from the crypto space, the fact that there are already so many exchanges in the market creates the opportunity to arbitrage several times over.
The best thing about arbitrage trading is that you don't need any technical knowledge to get it done. Simply spot the right opportunities and you'll make your profits.
Understanding Crypto Arbitrage
Arbitrage isn't new to the crypto space. In forex, arbitrage means finding differences in the prices of currencies and taking advantage of those differences by buying the asset at a low price and selling it at a higher one.
The same applies to crypto. Coin prices tend to vary between exchanges and brokers. Quick traders can take advantage of these differences to earn profits.
Arbitrage trading has become especially popular thanks to the growth of different crypto exchanges. Exchanges set the prices of coins based on the prices traders are willing to pay, leaving space for a bit of discrepancy in price across platforms.
Thus, you could have Bitcoin trading on Quidax at $40,000 while it's still $39,500 on Binance. The prices simply reflect the value of Bitcoin that traders on each platform are willing to pay. As an arbitrage trader, your job is to find these discrepancies and capitalize on them.
Going back to our Binance and Quidax example, you could purchase 5 BTC on Binance, paying $195,000. Then, you go to Quidax and sell your 5 BTC, earning $200,000. Just like that, you've made $5,000 without breaking a sweat.
The Factors To Remember In Arbitrage Trading
When it comes to arbitrage trading, speed is the name of the game. The discrepancies in coin prices tend to be short-lived. You only have a brief window to make gains.
The ability to make quick transactions plays a vital role in determining how much you'll earn from arbitrage trading. In arbitrage, you buy coins on one platform and transfer them to another. This transfer process is where many traders falter.
Crypto is known for quick transactions, so most arbitrage traders know the drill. Still, this isn't to say there aren't anomalies to the rule.
Another critical factor is platform liquidity. Buying and selling coins requires optimal liquidity to ensure that trades move and process quickly.
Be careful choosing the platforms that will handle your arbitrage trading. As a rule of thumb, only handle arbitrage trades through the largest exchanges. Of course, if you know an exchange is liquid enough to handle your volumes, you should be fine.
You can also work with direct brokers that handle trades on platforms like WhatsApp and Telegram. Just remember, liquidity matters most.
The Different Types Of Arbitrage
Arbitrage Between Exchanges
The most common form of arbitrage occurs between exchanges. Here, a trader buys coins on one exchange and transfers them to another exchange, where they sell at a much higher price.
But, as mentioned, this method isn't so smooth. The differences in prices may only last a few seconds. It can take minutes to send coins. You also need to consider the transfer fees incurred when you make transactions.
Here, you take three different cryptocurrencies and trade the difference between them on a single exchange.
For example, you might see an opportunity to trade Bitcoin, Ether, and XRP. If one or more of them is undervalued on the exchange, you could capitalize on arbitrage opportunities by selling your BTC for ETH, then trading the ETH for XRP before repurchasing BTC with the XRP. If your strategy makes the most sense, you will have more BTC in the end than when you first started.
Triangular arbitrage works because you're trading on a single exchange. There are no fees to consider, and you are free to move quickly.
Here, traders employ quantitative data to trade crypto. Traders use a statistical arbitration bot to trade hundreds of coins simultaneously, using a model to determine the bot's odds of profit from a trade.
Statistical arbitrage offers a different approach from other forms of arbitrage trading. With the right bot and in-depth market knowledge, statistical arbitrage traders do well.
All in all, arbitrage is an impressive way to make money with crypto. Coin prices are constantly in flux, and the savviest traders are reaping the benefits.