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12 September 2022

Updated: 01 November 2022

An Overview of Crypto Arbitrage Trading


An Overview of Crypto Arbitrage Trading

Table of contents

Millions of traders daily transfer and trade cryptocurrencies worth billions of dollars. Sometimes these transactions take place across multiple exchanges displaying different prices for the same asset.

This occurrence opens up an opportunity for traders and enthusiasts to profit from the price discrepancies through a trading method known as "Crypto Arbitrage."

What Is Arbitrage Trading in Crypto?

Arbitrage trading in crypto is a trading technique where traders purchase a crypto asset on one exchange and sell it on another for a higher price to earn profits. Arbitrage traders know that there are price differences for the same asset since one cryptocurrency may be available on several exchanges. Therefore, the traders simply buy the asset on one exchange for a low price and quickly sell it for more on a different exchange.

Arbitrage trading is a relatively low-risk trading strategy. However, because of the high volatility in the cryptocurrency market, the window of profitability is short-lived. Traders must quickly find price differences and take advantage of them before the window closes. Additionally, since the price differences are minor, profits are generally low margin-wise. This means arbitrage traders must put up large amounts to make substantial gains.

Many decentralized finance (DeFi) protocols offer crypto arbitrage in the form of yield farming. Platforms like Yearn Finance automate the process of helping users to find crypto arbitrage opportunities and execute trades using smart contracts. However, users must ensure that platforms carry out proper smart contract security audits before committing funds, or they may lose everything before the chance to profit.

Types of Crypto Arbitrage Trading Strategies

There are various ways to profit off price discrepancies using crypto arbitrage. Some of them include:

Exchange Arbitrage

This is the most common and straightforward type of arbitrage trading. A trader can purchase a crypto asset on one exchange and sell it on another at a higher rate to make quick returns. Exchange arbitrage does not limit the number of positions or transactions available to traders. Ultimately, the aim is to earn fast profits through multiple simultaneous transactions.

Spatial Arbitrage

This is another form of cross-exchange crypto arbitrage trading. The only difference is that the arbitrage trader looks for price differences between geographically separate exchanges. So, for example, a trader could capitalize on the difference in the demand and supply of a cryptocurrency on different exchanges in the US or the UK.

Triangular Arbitrage

In triangular arbitrage, traders earn profits through price discrepancies from three different crypto assets on one exchange or across multiple exchanges. To execute this arbitrage, a trader exchanges one asset for the second and then the third, earning profits from the slightest differences in prices across the assets traded.

Decentralized Arbitrage

This arbitrage method is common on decentralized crypto exchanges or automated market makers (AMMs) that use smart contracts to determine the prices of crypto trading pairs. If the prices of crypto pairs differ on decentralized exchanges from spot prices on centralized exchanges, arbitrage traders can capitalize on the difference and execute cross-exchange trades for profits.

How to Identify Cryptocurrency Arbitrage Opportunities

Some of the ways to quickly find the best crypto arbitrage opportunities include:

Automated Bots

The first step of crypto arbitrage trading involves finding a difference in the prices of crypto assets across exchanges. To do this, traders have to simultaneously monitor multiple cryptocurrency exchanges and keep doing calculations to find the asset with the most drastic price difference. Automated arbitrage trading bots can help perform fast calculations to determine the most significant crypto arbitrage opportunities at a fraction of the time taken if done manually.

Crypto Arbitrage Spreadsheets and Online Price Calculators

Price calculators and spreadsheets are helpful tools for arbitrage. Spreadsheets help traders navigate multiple exchanges, ever-changing prices, and various crypto assets. Online price calculators are available on many charts and help traders make faster arbitrage trading decisions.

How to Arbitrage Trade

Here are some step-by-step guides on how to execute arbitrage trades on one or more exchanges:

Arbitrage on a Single Exchange

Performing crypto arbitrage on one platform is straightforward.

  • After registration and verification on the platform, traders ensure that the exchange allows trading cryptocurrencies against Bitcoin and other altcoins such as Ether or USDT.
  • Traders deposit funds from their bank accounts or credit cards and start looking for arbitrage opportunities.
  • Traders who find opportunities strategically buy and sell the required crypto assets, make profits, and finally convert them back into fiat.

Arbitrage on Different Exchanges

Traders looking to explore cross-exchange arbitrage must complete the registration and verification processes on each platform. Each trader may then do the following:

  • Deposit funds on the two exchanges and closely monitor for arbitrage opportunities. This reduces the time required to move funds since arbitrage opportunities are usually short-lived.
  • Look for disparities in pricing between exchanges to identify arbitrage opportunities.
  • Calculate the potential profit from the arbitrage trade.
  • Double-check risk management strategy and execute the trade.

Traders should take note that slippage in crypto trading is very common. All traders must consider potential slippage when planning arbitrage trades.

Although crypto arbitrage trading is considered low risk, traders must consider the following:

Execution Risk

Taking advantage of arbitrage opportunities requires that all trades are quick. Traders who do not complete trades on time risk losing the arbitrage and may lose funds.

Trading Volumes Risk

Some crypto exchanges may have low trading volumes, which means they don't have adequate liquidity for traders to sell or buy.

Cost Risk

Traders must carefully calculate trading and withdrawal fees across different markets. Since fees are not static, a slight increase may lead to negative returns.

Fraud Risk

There is the ever-present risk of fraudulent players. These players include fake crypto exchanges and DeFi projects that swindle traders by promising high or impossible arbitrage trading returns.

Pros and Cons of Crypto Arbitrage Trading

Some of the advantages and drawbacks of crypto arbitrage trading are:

Pros and Cons of Crypto Arbitrage Trading

Is Crypto Arbitrage Worth It?

Crypto arbitrage is a low-risk way of earning in the cryptocurrency industry. When treated with due diligence, it can be a good source of income for experienced traders looking to diversify their portfolios. Interested traders can begin by using the AtomicDEX wallet to access a wide range of crypto assets to explore these opportunities.