Arbitrage is the name given to the purchase of assets that appear more profitable or that can be more productive by selling valuable assets.
The basics of Crypto Arbitrage are also simple, selling crypto on an exchange while buying crypto from an exchange that offers the lowest price. The main purpose of arbitrage trading between exchanges is to take advantage of price differences. However, the arbitrage opportunity is not good there, as the buy-sell spread and trading pairs in traditional markets are small compared to what is seen in the order books of crypto markets such as Ethereum (ETH) or EOS.
How Does Cryptocurrency Arbitrage Work?
A simple arbitrage strategy works by setting up multiple accounts that are priced higher on one crypto exchange and priced lower on the other. The investor takes advantage of market inefficiency to earn profits without too much market risk. This is a well-known trading strategy and it works as long as the transaction fee is not too high.
To make the strategy work without manual calculation and practice of trading, a crypto arbitrage trader can develop a crypto bot that trades when exchange platforms offer different price quotes for the same asset.
Is Cryptocurrency Arbitrage Profitable?
For a Crypto Arbitrageur, inconsistencies between changes are always an opportunity due to the high volatility in prices and trading volume. For this reason, Cryptocurrency Arbitrage is still profitable, but offers an excellent way for investors to increase their crypto holdings. Cross-border arbitrage is still a good way to gain a good edge in the market.
Besides, investors are scanning the market to create crypto bot systems that quickly minimize any profit opportunities, and Bitcoin Arbitrage is getting harder and harder.
How to Calculate the Costs and Profits of Crypto Arbitrage
The costs and profits for the arbitrage opportunity are based on a simple calculation. It is necessary to deduct the cost of the asset value from the purchased asset. In addition, it is necessary to subtract any trading fees from this profit for both the bought and sold position. The remainder is the profit of the investor.
For example, if you sell 1 BTC at $50,000 on one exchange and buy 1 BTC for $49,500 on another exchange, the difference will be $500.
What are the types of arbitrage opportunities?
There are several types of crypto arbitrage opportunities. The first of these arbitrage with inter-exchange transferis.
With inter-exchange transfer, which is the easiest way to arbitrage, arbitrage requires that an asset purchased on one exchange be transferred to another exchange and sold at a higher price. However, arbitrage with transfer between exchanges creates time loss and additional transfer costs.
One of the other Arbitrage types is, arbitrage without transferring between exchangesis .
This type of arbitrage does not require crypto transfer between exchanges and allows to act on the price difference instantly. All that is required is to hold assets on two exchanges and place a buy and sell order at the same time when the price difference is high enough.
For example, if you buy 1 BTC for $10,000 and sell 1 BTC you own on the other exchange for $10,100, the difference between $10,000 and $10,100 is your profit.
Another type of Arbitrage Triangle Arbitrage is . Triangular arbitrage requires more computation; however, many crypto arbitrage tools calculate it automatically.
The basic principle in Triangle Arbitrage is to choose three cryptocurrency pairs such as ETH/BTC, XRP/BTC and XRP/ETH on a single exchange. Then exchange ETH for BTC, BTC for XRP, and return XRP to ETH back to the starting point. There should be a significant difference in pricing between all three pairs, which is not commonly seen on major exchanges and mostly seen in times of increased volatility. Orders placed under such market conditions may not be executed at the calculated price. For this reason, you should be careful.
