What is cryptocurrency arbitrage?

Buying assets at a discount and then selling them at a higher price is the only way to make a profit in the market. The trader’s net profit is equal to the difference between the cost of buying and selling. A similar idea underlies arbitrage trading.

The price of one cryptocurrency can change dramatically from one platform to another. For example, bitcoin can be worth $25,000 on Binance and $25,500 on another exchange. Arbitrage traders use this difference to their advantage to profit.

The exchange operation takes place in two stages:

• buying cryptocurrency in the market, where the price is more affordable;
• sale of the same asset at a higher price on another exchange.

Orders opened on the same exchange are included in intra-exchange arbitrage. In this case, the trader profits from the difference in prices of the same asset in different trading pairs.

Numerous variables influence how much a particular cryptocurrency is worth. For example, there can be a difference between the over-the-counter exchange rate in USDT and BUSD pairs. Trading commissions and withdrawal restrictions also affect the price.

The exchange operation takes place in two stages:

• buying cryptocurrency in the market, where the price is more affordable;
• sale of the same asset at a higher price on another exchange.

Orders opened on the same exchange are included in intra-exchange arbitrage. In this case, the trader profits from the difference in prices of the same asset in different trading pairs.

Numerous variables influence how much a particular cryptocurrency is worth. For example, there can be a difference between the over-the-counter exchange rate in USDT and BUSD pairs. Trading commissions and withdrawal restrictions also affect the price.

Income from arbitrage

In order to engage in arbitrage, a trader must register accounts on all platforms where he or she plans to make money. While trading, it is very important to hunt for coins whose value changes on different exchanges or between currency pairs.

The trader can follow many charts at the same time during the day. It is important to conclude a contract as soon as he discovers suitable values. This procedure can be automated with specialized software and bots.

One of two algorithms can be used to perform an interchange transaction:

• Open a long order on one exchange, and then immediately a short order on another exchange.
• Buy cryptocurrency on one exchange and then transfer it to another exchange to sell it for more.

The second approach gives the exchange rate enough time during an inter-currency transaction to shift in a negative direction. In such a scenario, the price difference can disappear and the trader will be left with nothing. Therefore, it is better to choose cryptocurrencies built on blockchains with a high turnover rate for arbitrage.

Earning tactics

There are several forms of bitcoin arbitrage to profit from currency differences.

Interchange arbitrage

This is the most popular strategy for profiting from bitcoin fluctuations. The more inter-exchange arbitrage platforms are used, the easier it is to detect a noticeable divergence in quotes.

It is difficult to keep track of several exchanges and currencies on your own. That’s why traders automate interexchange arbitrage with the help of bots and software.

These bots can independently analyze dozens of bitcoin exchanges (both controlled and decentralized) and hundreds of trading pairs. According to statistics, the trading software currently handles up to 99% of all arbitrage trades.

In addition, some traders can buy signals for arbitrage trading. In this case, a bot or software tells users which cryptocurrencies to buy or sell and on which exchanges.

The following elements contribute to the problems of interchange arbitrage:

• restrictions imposed by trading platforms. Exchanges that are regulated by the authorities have the ability to monitor and crack down on questionable behavior.
• the possibility of delayed exclusion from the exchange. The probability of smaller gains or losses in the arbitrage process increases with any long transactions. Long and short orders are used to reduce this effect.
• The need to keep track of exchange fees and transactions. They reduce the profits that are generated by the difference in price between buying and selling.
• incorrect operation of bots. The trader’s profits and losses are affected by the program that automatically opens orders. Sometimes the bot may start to participate in unproductive trades. If it is not turned off in time, you risk losing your money completely.

The potential for profit with very little risk is a major advantage of interexchange trading. The standard arbitrage profit per transaction chain is 0.01%, but you can increase your income by trading aggressively.

Intra-exchange arbitration

The process of intra-exchange arbitrage involves making a number of trades on a single platform. At least three related trading pairs are used. Due to the significant difference in prices a profit is generated.

Dependent assets can be used to illustrate:

• The value of cryptocurrency X is $5000.
• The value of Y cryptocurrency is $500.

In this case 1 X will be equal to 10 Y. However, during a surge of trading volume in the X/Y pair, an increase may occur, for example, to the value of 1X = 11Y. In this case, the value of both assets in the currency equivalent may remain unchanged.

Under such circumstances, the trader can perform a sequence of trades:

• Buy 1 coin for $5000.
• 11Y is exchanged for 1X.
• Sell 11Y for $5500.

As a result, the trader earned $500 on the intrachange difference.

Taking into account the commissions, intra-exchange arbitrage is more profitable than using several exchanges, because there is no need to pay for transferring money between them. The trader does not need to spend time on transactions between exchanges, which is another advantage of this type of arbitrage. As a result, trading using the structure of intra-exchange arbitrage allows you to respond quickly to market fluctuations.

The actual disadvantage of intra-exchange arbitrage is the exchanges’ own limitations. They are constantly examining quotes to find rate correlations. Since the discrepancies found are quickly eliminated, arbitrage often results in losses. It is better to combine intra-exchange and inter-exchange arbitrage to increase total returns.

Multicurrency interchange arbitrage

This trading strategy combines intra- and inter-exchange arbitrage, allowing you to include many cryptocurrencies and multiple exchanges in transactions.

For example, a trader can perform the following series of transactions:

• Buying XRP for USDT on the A exchange.
• Exchange XRP to BTC on the exchange B.
• Selling XRP for BUSD on the A exchange.

Manually identifying and executing such chains of transactions is very difficult. That’s why bots are especially relevant for them.

Since there is no fee for transferring money between exchanges, intra-exchange arbitrage is more profitable than using multiple exchanges, if commission costs are taken into account. The trader does not need to spend time on transactions between exchanges, which is another advantage of this type of arbitrage. Thus, trading using the structure of intra-exchange arbitrage makes it possible to react quickly to market fluctuations.

The actual disadvantage of intra-exchange arbitrage is the exchanges’ own limitations. They are constantly examining quotes to find rate correlations. Since the discrepancies found are quickly eliminated, arbitrage often results in losses.

It is desirable to mix domestic and interexchange arbitrage to increase overall profits.

Multicurrency interchange arbitrage

This trading strategy combines intra- and inter-exchange arbitrage, allowing transactions with many cryptocurrencies and multiple exchanges.

For example, a trader can make the following series of trades:

• Buying BNB for USDT on exchange A.
• Exchange BNB to BTC on the B exchange.
• Selling BNB for BUSD on the exchange A.

Manually identifying and executing such chains of transactions is very difficult. That’s why bots are especially appropriate for them.

Collaboration with various markets

Trading between the spot market and the futures market can be done by qualified arbitrageurs.

Futures positions are opened using a variety of contracts, including open-ended, monthly, quarterly, etc.

This type of arbitrage yields notable results when market fluctuations are significant. Transactions often occur during the development of news impulses. The gap between the market price and the contract rate at this time can be significant.

Tools (software) for cryptocurrency arbitrage

The arbitrage process can be optimized by using various tools. They facilitate trading and fast tracking of quotes on many exchanges.

Course Scanners

Rate scanners allow you to track changes in the value of many different assets on specific exchanges. Such programs often have a user-friendly interface that presents trading data in the form of tables and charts.

The arbitrator evaluates the collected data before deciding to buy or sell the cryptocurrency. Transactions require manual labor to complete.

Paid scanners are the most effective because they provide the fastest and most accurate information.

Software that compares exchange rates

Such tools should be downloaded to your computer or mobile device to compare quotes of selected assets on several cryptocurrency exchanges.

The fundamental operations of such software may differ:

• an estimate of the value of all digital assets available on certain exchanges;
• a study of the value of specific currencies on all exchanges.

By choosing suitable cryptocurrencies and exchanges, traders can adapt such software to their interests.

Bots for online trading

Trading bot fully automates inter- and intra-exchange operations, unlike programs for reference information.

Such programs are capable of performing each major task independently:

• Continuously view stock exchange quotes according to the set parameters;
• look for spreads that will allow you to make a profit
• completely remove the issue of the human component, clearly following the algorithm;
• Make trades immediately when the market is favorable.

For many commercial arbitrage bots, demos are available, which allows you to evaluate their quality.