What is Crypto Arbitrage and is it Worth it?

DateJuly 24, 2021
Reading Time12 min
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Mathieu Hardy
Chief Development Officer
Bitcoin and other cryptos are found on multiple exchanges across the globe and available to trade 24/7. This is where crypto arbitrage comes in.
Introduction

Cryptocurrencies have, over the past few years, grown to be much more of a mainstream phenomenon. In part, this comes down to the way in which people are interacting with things like Bitcoin. The financial nature of Bitcoin, with its open market and arguably easier trading conditions than traditional assets, has also meant that there are always new and familiar ways to try and make money off it.


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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. It is also entirely global and not bound by borders or national restrictions. Bitcoin and other crypto assets can also be found on multiple exchanges across the globe whereas traditional assets are much more limited, although still more robust for trading.

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. Again, because of the volatile nature of coins like Bitcoin, people believe that they can take good advantage of large price discrepancies across multiple global exchanges. However, this is not exactly a silver bullet for money-making in crypto.

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 trading. But, what exactly is crypto arbitrage, and is it as easy as buying low somewhere, selling high somewhere else?

What is Crypto Arbitrage?

What is Crypto Arbitrage Trading?

Simply put, arbitrage trading is a trading strategy, in which a person purchases an asset on one exchange and sells it on another to profit from a deviation in price between markets. As an example, 1 BTC costs $30,000 on Binance but it's currently also trading at $30,100 on Kraken. Because of the discrepancy in these crypto exchange prices, there is a $100 opportunity for arbitrage.

In this instance, you purchase your Bitcoin on Binance and hopefully, you will be able to sell it quickly enough on Kraken to make that $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 certain way to always make quick profits.

Not only are there risks to consider that come with cryptocurrency trading in general, but there are also difficulties, unforeseen costs, and even bigger than expected barriers to entry.

How does crypto arbitrage work?

How does crypto arbitrage work?

As explained above, crypto arbitrage is looking for the same digital asset selling at different prices and taking advantage of that. There are mainly two types of crypto arbitrage trading: Arbitrage between crypto exchanges and Arbitrage within the same exchange.

The former is the most basic way to make crypto arbitrage work for you as different exchanges will have slightly different markets. But, within Arbitrage between exchanges, some variations help you take advantage of price differences.

Cross-border arbitrage is arbitrage in two exchanges that are situated in different countries.

Statistical arbitrage is a quite difficult trading strategy to pull off as it involves mathematical modeling to invest in hundreds, if not thousands, of options in a short space of time. It is quite risky as in a crypto market; things can change within a short period.

So, once you have identified the two exchanges you want to play off each other, then it is time to enact the arbitrage 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, then you may run a risk of generating less arbitrage. Factors like geographic location, time of day, and even different news cycles can all move the crypto asset prices within those 15-20 minutes and destroy your hopes of being successful in an arbitrage trade.

Is cryptocurrency arbitrage profitable?

Is cryptocurrency arbitrage profitable?

Arbitrage is a well known and established practice with a number of markets. For this reason, it is certainly profitable, or at least has the potential to be. However, it takes a lot of dedication and persistence.

The crypto arbitrages are usually quite small. You can earn profits from the differences in multiple markets, from about 0.2 - 2.5% ($10 to $100) every day. If you focus on around ten such spreads every day, you can 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 trades. If you are persistent and quick to take action on profitable opportunities, you can earn a decent profit from arbitrage. But it will really be a factor of how much money you put to work. Making 2% off of 500€ is not the same as 2% off of 1 million.

But, it is about being aware and quick. It is up to you to recognize differences across various exchanges, and you need to access multiple listings at once given that cryptocurrency exchange operates 24/7/365, it can be very time-consuming.

Pros and Cons of Crypto Arbitrage

Pros and Cons of Crypto Arbitrage

As with everything, there are certain pros and cons to arbitrage trading, and a lot of it depends on you as a crypto arbitrage 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 on paper and a lot needs to be considered.

PROS

Fast Profit

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.

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 Still 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 crypto exchanges. There are also a fewer number of cryptocurrency traders than in the traditional markets, and thus less competition in the market, which leads to potentially profitable price discrepancies.

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 for crypto arbitrage traders, as there can be huge price changes between exchanges and this makes for a more lively opportunity for bigger arbitrage trades.

CONS

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 crypto exchange is based

Fees

This can be quite a hidden barrier for arbitrage. Because users are operating with often small profits, any trading fees, withdrawal fees, network fees or exchange fees, can impact the profitability of arbitrage, or even cause losses.

Start up capital

In order to really profit from crypto arbitrage trades, and make it worthwhile with the small margins of profit, there is a need for a large starting capital amount that many beginner arbitrage traders do not consider.

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.

Slower Transactions

Crypto transactions are also susceptible to market volatility in terms of their speed and accessibility. When the crypto markets are on the move - the best time for arbitrage traders - it is not uncommon to have slower transactions or even downtime on exchanges. You can counteract that with large positions of working capital at two or more exchanges, but that requires that you trust those exchanges and that you have a lot of working capital at your disposal.

Competition

There may be more traders looking for arbitrage, and this may lead to changes in the trading volumes on different exchanges. This may also reduce arbitrage opportunities for others. And do you really think you stand a chance against the bright minds at FlowTraders?

Things to Know

Things to Know and to Watch Out For

Understanding the pros and the cons of crypto arbitrage trading will help you decide if this is the right trading strategy for you, but if you do decide to go down this route, and begin arbitrage trading, there are a few more things to watch out for. A number of other pitfalls can trap unsuspecting traders, and there are a few more tips and tricks that can make it a more enjoyable experience.

Similar Sounding Coins

The cryptocurrency space is large and constantly expanding. New crypto assets are being created and brought to market all the time and they can often have similar-sounding names which can trap 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' and you're going to end up losing all your coins if you confuse the two.

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 crypto market with the express purpose of stealing money from investors - if you arbitrage trade 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 traders.

Lack of Volume

Often when looking for arbitrage opportunities, you may be led to smaller, lesser-known coins with good potential for arbitrage trading. However, these coins can also lack trading volume. This hampers large trades of the coin but also can lead to bigger concerns such as delisting. You can avoid running into that issue by keeping an eye on the exchange order book and making sure that you see transactions moving or if they're standing still.

Conclusion

Is it worth it?

Having considered all of the above, it is time to decide if crypto arbitrage trading 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 magic bullet for making easy money.

Buying a coin low, moving it across 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 before you execute arbitrage trades. Dealing with crypto is still challenging and often lacks an easy user interface. More than that, lack of full regulation means there are issues surrounding scams and schemes.

But besides all of that, it is rather 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 any decent scale, because if you are doing it manually, you are not competitive.

And don't forget to take taxes into account.

Crypto arbitrage is one option out there to make money. But unless you have millions at your disposal and can code a decent bot to help you out, it's probably not the opportunity you are looking for.

After reading this if you decide arbitrage trading isn't one of the trading strategies you wish to incorporate for yourself, but you do want to invest in the crypto space and get a share of the future, we do have an option for you at OSOM. The Crypto Autopilot automatically builds a very diversified portfolio of quality crypto so you are exposed to the best of what the space has to offer. But using a quantitative portfolio building algorithm like the ones you can find on Wall Street, and not just an indexing formula that looks at the top x coins.

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Mathieu Hardy
Chief Development Officer

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