Bitcoin arbitrage is an investment strategy in which investors buy bitcoins on one exchange and then quickly sell them at another exchange for a profit. Because bitcoins trade at different prices on different exchanges, it’s an opportunity that many investors have seized in recent years.
Arbitrage is not unique to Bitcoin investing. It occurs across the capital markets, wherever the same asset trades for different prices in different places. To take advantage of those inefficiencies, investors will buy in one place and sell in another to exploit those price differences.
Bitcoin arbitrage differs from other forms of arbitrage in that it’s harder to place a value on Bitcoin. Because it’s completely digital and not based on an underlying asset, it doesn’t have the same pricing conventions as do equities and bonds, which are tied to the performance of a company, municipality or nation.
With there are more than 200 exchanges available to people investing in cryptocurrency, there are likely to be many different Bitcoin prices available at any given moment for people who want to try crypto arbitrage. But not all exchanges are created equal. Some have enormous trading volumes, while others aren’t as active. The trading volume on each affects the liquidity and the available prices on a given exchange.
Cryptocurrency price differentials can be substantial across exchanges. It presents traders with a legit opportunity to take advantage of price inconsistencies.
There are three distinct ways to do crypto arbitrage:
- Regular arbitrage, which refers to buying and selling the same digital assets on different exchanges with significant price differences.
- Triangular arbitrage, which involves price differences between three currencies on the same exchange. You try to take advantage of price differences through several conversions. For example, you buy BTC with USD, sell BTC to ETH, and convert ETH back to USD.
- Automated arbitrage. Some companies specialize in providing tools for automated crypto arbitrage. For example, one of the leaders in this niche is ArbiSmart which provides a quick way to deposit funds, choose a plan, and reap the benefits of automated arbitrage trading.
While all approaches are legit can be profitable, it might be more challenging to discover opportunities for triangular arbitrage within the exchange. Conversely, large volume trading on the same exchange might qualify you for attractive fee discounts that can have a positive impact on your profits. By far the easiest way to do crypto arbitrage is by using third-party arbitrage software, but then you will have to pay special attention to your service provider and how much their services cost.
Step-By-Step Crypto Arbitrage Process
A step-by-step crypto arbitrage process goes like this:
- Discover opportunities.
Many tools can help you find crypto arbitrage opportunities.
Some platforms offer a convenient price tracker which can help you to identify crypto arbitrage opportunities between some major exchanges and cryptocurrencies.
Other handy instruments for finding arbitrage opportunities are:
- Crytpo Arbitrage App
- Decide whether the opportunity is worth it.
This is the critical moment which constitutes whether you’re going to make a profit or not. It is essential to do as much planning as you can before jumping into the trade. You need to look into:
- Estimate fees: transaction, transfer, network, deposit or wallet costs.
- Research the risks: withdrawal and transfer times, market volatility, wallet maintenance, and rules or preconditions regarding exchange trades and withdrawals.
- Weigh how much of your profit will go to taxes (if applicable).
A good strategy is open, verify, and fund your accounts (both in fiat and crypto) on numerous exchanges before you spot an arbitrage opportunity. It will help you to save much precious time when executing trades. Also, at times you might want to avoid BTC transfers between the exchanges since the network known for being relatively slow and expensive, but it is an issue only when it becomes congested.
After you determine whether the exchanges and opportunities are suitable for a quick, profitable trade, it’s time to either execute it or look for another golden chance.
Arbitrage Automation Programs
Aside from manual arbitrage trading, there are platforms that offer software to help you find opportunities and execute trades automatically. They employ bots and scripts which scan certain exchanges 24/7 and can generate a profit on their own. Of course, they come with a fair share of risks, too, so you have to be careful not to play with the money you can’t afford to lose.
Some of the best automated crypto arbitrage companies offers investors different plans starting from mere 500 euros.
There are multiple arbitrage techniques and opportunities that one can benefit from, whenever there is a market inefficiency. However, as more traders indulge in arbitrage, these opportunities start to disappear as soon as they arise. This helps the market to stabilise, and the prices may end up similar across exchanges.