If you are in the market, you must have heard about the term, “Arbitrage.” As a crypto trader, you know how important it is to learn about different techniques and use them to maximize your profit.
In today’s article, we will be covering arbitrage. It is a beginner’s guide where you learn about its actual meaning, benefits, risks and the process to carry out a successful arbitrage. But, before, we move forward, we need to stay clear that the information shared in the article is for education purpose only. This means that you should be wary of where to invest, how much to invest and make decisions by yourself.
The general rule of thumb is to buy low and sell high. But, it is not as simple when you trade in such a volatile environment. You need to take advantage of different methods that can help you further improve your chances to make a profit. One of these methods includes arbitrage. So, without any delay, let’s get started with the guide.
Table of Contents
What is Arbitrage?
Arbitrage is the method by which you can buy and sell cryptocurrency assets simultaneously on multiple platforms or market. The catch here is the difference in price that these markets offer. By doing arbitrage, you can earn a profit. To do so, you need to find two exchange and then buy the cheaper asset on one exchange, only to sell it on the other exchange. The whole process of buying from one place and selling to other is known arbitrage.
Arbitrage is not only valid for the crypto market. It is equally used in traditional markets such as foreign exchange, bond, and stock markets as well.
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Doing arbitrage in cryptocurrency in much more comfortable compared to traditional markets. The value of an asset can differ vastly in two different exchange. The price difference can be because of liquidity, local market conditions, and so on. Most of the time, the price of an asset is controlled by the larger exchange.
How to do Cryptocurrency Arbitrage?
Great, so you are now ready to learn how to do arbitrage. The best way to get started with arbitrage is to monitor the prices over different market or exchanges manually. Once you see a difference, transfer the asset and sell it for profit. Easy, right? Well, it is much easier with the help of the cryptocurrency arbitrage bots.
These bots are designed to automatically identify the opportunities by monitoring the price movements across different exchanges and market. However, as a normal trader, it might get hard to get access to a good bot out there.
To do a successful cryptocurrency arbitrage, you need to follow the steps mentioned below:
Step 1: Find the Arbitrage Opportunity
The first most crucial step is to find the opportunity. As we already mentioned, you can monitor the prices yourself. The opportunity lies within the cryptocurrency market itself. It is not regulated and completely decentralized which means that you will get a lot of opportunity across different exchange that operates 24/7. The timezones, local market conditions, and speculations open up a new opportunity for you.
You can use CoinMarketCap to learn about the arbitrage opportunity. Below is an example of IOTA markets. As you can see that there is a price difference between Bitfinex and Binance:
As a trader, you can buy IOTA from the exchange that offers a lower price. This way you get the maximum number of IOTA from your investment. Once done, you can go to the exchange with a higher price and sell it off. This way you can gain anything between 1-20% of profits.
Step 2: Fees Need to be Included
Before you jump the gun, you need to take note of the fees that are associated with arbitrage. It is not that easy when it comes to buying and selling. Exchanges always take a cut when you buy or sell a crypto asset. That’s why you need to be wary of the total cost incurred rather than just the difference you see initially. Moreover, you also need to make sure you take the transaction fees of transferring your crypto from one exchange to another. By doing a proper calculation, you can decide whether you want to go with the arbitrage opportunity or not.
Benefits of Arbitrage
There are many benefits of arbitrage. Let’s list a few of them below.
- Easy and fast way to earn a profit: Arbitrage when done right gives you the opportunity to make money in the easiest way possible.
- Opportunities are easy to find: With tons of exchange and an unregulated market, you are bound to find more arbitrage opportunities which in turn will increase your chance of a successful arbitrate.
- Volatility: Volatility adds more chances for you to make a profit.
- Infancy: Cryptocurrency is still new and you might want to take advantage of it. It is unregulated so you will get good chances of price differences.
Risks associated with Arbitrage
Just like any other trading technique, arbitrage is also not free from risks. There are many risks that you should know about. Let’s list them below.
- There are KYC regulations that might hinder your ability to use a particular exchange.
- Exchange fees: Sometimes exchange fees can be too much for you to make a profit.
- Withdrawal limits: Exchange enforce withdrawal limits to ensure proper operations. This can lead to problems if you love doing regular arbitrage.
- Coins stored on the exchange can get stuck due to exchange policies.
- You should be aware of slow transactions that can completely kill your arbitrage opportunity.
- The price difference stays for a small amount of time and if you fail to execute it correctly, you will get stuck.
There is tons of competition out there and you also need to keep that in mind when doing arbitrage.
Cryptocurrency arbitrage is a promising prospect for a lot of traders out there. However, it does come with risks associated with it. In today’s guide, we covered arbitrage at a beginner’s level. This guide will help you equip yourself with the knowledge to do an arbitrage successfully.
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