Trading — scalping, swing, and intraday — is widely associated with high risks, but not every approach to trading is like that. Crossed markets give traders the opportunity to take advantage of the price variations of different markets without taking on the risks of market inefficiency. This is what defines arbitrage trading.
How do you trade arbitrage in crypto?
Arbitrage trading is a trading form that can simply be described as “buy at a lower price on one market and sell at a higher price on another.” The key to arbitrage trading is to make the deals almost simultaneously, with minimum delays, so that the price is not affected by price action.
Let’s have a look at an arbitrage trading example.
Imagine that you trade BTC/USDT on two exchanges, Binance and Xena Exchange. You have 0.3 BTC and 1000 USDT on Binance and 0.5 BTC and 500 USDT on Xena Exchange. You see that the current BTC price on Binance is 8250 USDT and on Xena Exchange the price is 8265. What do you do? You buy on Binance and sell on Xena Exchange at the same time.
- Buy 0.12 BTC on Binance
- Sell 0.12 BTC on Xena Exchange
- Profit: 1.8 USDT
Now you still have 0.8 BTC accumulated on the two exchanges, but you now have 1.8 USDT more. No risks, as you can see.
Still, this freedom from risk comes with several restrictions. First and foremost, you need to either trade in larger volumes, as the market price variations allow you to win only small percentage returns per trade, or you need to execute a huge number of trades per day. Here, you need to take into consideration that transaction fees can sometimes take away your entire revenue when you trade in smaller volumes. Furthermore, you need to hold funds on several exchanges to make the most of price differences, and this requires large capital. Making transactions with assets between exchanges can be time- and cost-consuming, and the key to arbitrage is to execute trades without any delays.
It’s also possible to do arbitrage trading on a single exchange using different pairs. For example, an altcoin may be paired with Bitcoin and Ethereum but have slightly different prices for both. If the Bitcoin pair is cheaper, a trader can buy the altcoin and immediately sell it under the Ethereum pair.
Volatility arbitrage trading strategies
Arbitrage trading works the same in any market, be it the stock market, forex, or crypto. So, there are hardly any special strategies just for crypto arbitrage trading. Nevertheless, there are some features that differentiate the markets from one another. In the cryptocurrency market, the volatility is significantly greater, and this volatility can be a positive factor for arbitrage. Sharp and sudden changes can create significant disparities in prices across exchanges. It is not uncommon for digital currencies to experience a 15–20% drop or increase in a 24-hour period.
Furthermore, there are over 200 exchanges on the cryptocurrency market globally, which breeds enormous opportunities for arbitrage traders. There are online tools and software solutions that let traders monitor the current prices on different exchanges, such as CoinArbitrageBot. To benefit from the rapidly changing cryptocurrency market, many use bots to perform arbitrage trading.
Arbitrage trading bots
Trading bots operate on the same arbitrage principles but have certain advantages.
- First, an arbitrage bot is much faster, and considering that speed is essential, this is a major advantage.
- Second, an arbitrage bot never needs to rest, eat, or do anything except hunt for price disparities. A cryptocurrency arbitrage bot scans for and detects gaps in prices and executes orders for a profit.
Some bots are limited to arbitrage on a single exchange, while other, more powerful software programs detect price gaps on multiple exchanges and execute a profitable buy and sell, assuming the coin pairs are available on both platforms.
An advanced arbitrage bot can play a critical role in trading success depending on its speed and endurance to maximize opportunities. To achieve optimal performance, however, it’s essential to configure the bot according to your circumstances and make sure it acknowledges any restrictions (such as the need to manually rebalance a wallet).
Bitcoin arbitrage trading
Bitcoin arbitrage trading has become pretty popular because this asset is a must-have on all crypto exchanges, which provides enormous opportunities for implementing arbitrage trading. One thing to remember, though, is that Bitcoin arbitrage trading is almost impossible if you do not already hold BTC on different exchanges, as the BTC transaction time from one platform to another takes up to 30 minutes. This should be a significant consideration for anyone looking to do manual arbitrage trading across two exchanges.
Arbitrage is a popular cryptocurrency trading strategy for a variety of reasons. First, it offers limited downside risk, it works in any market (up, down, and sideways), and it’s a relatively easy technique to implement.
There are some considerations, however. While the risk is limited, it still exists — for example, if you’re trading manually, it’s possible to get stuck “holding the bag” if you don’t execute the arbitrage trade quickly enough and miss the opportunity. Arbitrage also requires some legal and operational work, such as opening accounts at various exchanges and ensuring your software is optimized and efficient. Furthermore, traders sometimes need to rebalance their wallets manually, even if they use bots.
If done right, however, arbitrage is one of the most effective and low-risk crypto trading techniques. By using the correct set of tools, you can place yourself in the best possible position to profit.