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A Guide to Crypto Arbitrage

19.05.2021

What is crypto arbitrage, and how does it work?

This trading strategy takes advantage of the fact that crypto assets can be traded at different prices on different exchange platforms.

Crypto arbitrage is becoming more and more popular in the crypto market, which is why you’re here, reading about it. It sure is an attractive way to make profits.

This guide will tell you about the pros and cons of crypto arbitrage as well as the best ways to engage in it.

What is Crypto Arbitrage?

Crypto arbitrage is a form of financial arbitrage. As mentioned in the introduction, engaging in crypto arbitrage means taking advantage of a digital asset traded at different prices.

To put it as simply as possible, if you buy a digital asset for a lower price on one crypto exchange and sell it for a higher price on another, you’ve engaged in crypto arbitrage.

Why Does it Occur?

Ideally, crypto arbitrage shouldn’t exist as such. But we all know too well that the markets are only ideal in textbooks.

Truth is, crypto arbitrage exists for a number of reasons. Here are the most obvious ones:

  • Different withdrawal and deposit times. Every exchange is different. So are transfer times and costs. These are too major opportunities for crypto arbitrage.
    The faster the transfer times, the sooner the catch-up with the market. The lower the transfer fees, the more crypto arbitrage opportunities.
  • Fiat currency rates. Suppose the price of a crypto asset is the same, but the asset is traded against different foreign currencies – voilà, there you’ll find an arbitrage opportunity.
  • Exchange types. Different exchanges have different customers and clients. We make a difference between customers and clients on purpose. Where there are clients, there may be larger limit market orders, which means there’s an opportunity for crypto arbitrage.

How Does it Work?

It may all come down to supply and demand. Let us explain by means of an example.

Trading volumes, ergo supply and demand, are high on larger exchanges. This means that the price of the asset of your choice will be lower.

Smaller exchanges, however, will likely set a higher price for the asset as the demand is not that high and the supply, more limited, as a result.

So, if you buy the asset on the larger exchange and sell it on the smaller one, you’ll take advantage of the crypto arbitrage method and make a profit.

Types of Crypto Arbitrage

Generally, we differentiate between three crypto arbitrage types: simple arbitrage, triangular arbitrage, and convergence arbitrage.

Simple Arbitrage

Simple arbitrage, also known as spatial arbitrage, means buying and selling the same crypto asset simultaneously on separate exchanges. It’s the most common type of arbitrage.

Triangular Arbitrage

This type of crypto arbitrage involves trading between three different currencies.

For instance, you buy BTC for XCM, sell BTC for EUR, and then exchange EUR back to XCM.

Convergence Arbitrage

Convergence arbitrage (CA) is a more complicated strategy, mostly used by advanced traders.

In short, CA involves buying a crypto as an undervalued asset and short-selling it as an overvalued asset. When the prices meet at a median price, the trader takes double profit.

A Simple Example

Let’s assume Exchange A is a larger exchange with higher trading volumes. The BTC price on this exchange is $42,100.

Exchange B is a smaller one with a lower trading volume. The price of BTC on this exchange is $42,105.

Now, let’s imagine that there’s an important announcement that’s likely to boost the demand for BTC.

Exchange A is likely to experience a surge of buyers, resulting in an increase in the BTC price. Exchange B, however, is smaller, which means it will react slower to the market change.

So, BTC reaches $49,290 on Exchange A, but only rises to $49,090 on Exchange B. This is an arbitrage opportunity.

What you can do is buy BTC on Exchange B, transfer your BTC to Exchange A, and sell your BTC on Exchange A for a new, higher price, securing a return on your investment.

The Pros and Cons of Crypto Arbitrage

Next, let’s get down to the upsides and downsides of the crypto arbitrage strategy.

Pros

  • Low risk. Every investment comes with a certain degree of risk. However, crypto arbitrage comes with very low to zero risk. See, when you engage in crypto arbitrage, you buy and sell assets simultaneously, not investing long-term.
  • Fast way to profit. As mentioned above, in crypto arbitrage, we buy and sell assets within a short period of time – typically, within a couple of hours.
  • Vast market. The crypto scene is growing by the day. Do you know how many crypto exchanges are there in the world? As of date, around 504! It’s not difficult to guess that there are smaller and larger exchanges with very different trading volumes, posing a decent number of arbitrage opportunities.
  • Volatility. That’s right, when it comes to crypto arbitrage, volatility is your friend. And the crypto market is as volatile as it can be. This means that the price vary greatly, thus creating more arbitrage opportunities.

Cons

  • KYC. Most major exchanges require their users to undergo the KYC procedure, which, in case of a less efficient customer support may prevent them from arbitraging fast enough.
  • Technical problems. No matter how advanced the technology of an exchange, glitches and bugs will happen. The worst nightmare is an exchange freezing at a crucial moment.
  • Fees. Traders tend to overlook this important detail. Please consider all the fees before calculating your final profits.
  • Security risk. As an arbitrageur, you are likely to keep most of your assets in your exchange accounts – for the sake of convenience and prompt execution of deals. However, experience has shown that exchanges get hacked and assets, stolen.

How do I Become a Crypto Arbitrageur?

In the following bit, we’ll share some tips and tricks on what to keep in mind before engaging in crypto arbitrage.

  1. First off, decide which listings are likely to provide arbitrage opportunities. Do some research, monitor the markets. Here’s a tip: look for new listings.
  2. Decide on your budget. How much capital are you willing to – better, can you afford to – invest?
  3. Make sure your trading is diverse.
  4. Use a trusted, reliable, and legit exchange. CoinMetro is the one.

Why Sign Up for a CoinMetro Account

Legitimacy

CoinMetro is a licensed EMI agent. This license allows our exchange to operate and offer third-party and payments in both crypto and fiat.

In addition, CoinMetro is a registered member of the AUSTRAC in Australia and the FinCEN in the USA.

What’s more, we hold EU-issued licenses for fiat-crypto wallet services and crypto-crypto exchange. Obtaining similar licenses is a very demanding process. It can take up months of scrupulous paperwork and auditing. As supporters of crypto regulation, we believe there’s no shortcut when it comes to legitimacy.

Diversity

Our list of crypto assets is ever-growing and has very exciting names on it – the majors and the newcomer altcoins and tokens.

Fees

Did you know that the fees on CoinMetro are the lowest in the industry? Now you do.

Speedy Transactions

We are able to offer instant ACH, SEPA, SWIFT, and generally faster payments.

Best Customer Support 24/7

The only stupid question is the question that is never asked. Our people are available for you round the clock.

Open an account with CoinMetro and complete your KYC today!