How Arbitrage Trading Works?

How to ease the task when a trader doesn’t have enough time to explore and analyze the market? Automation is the key, especially for arbitrage trading. This guide explains arbitrage meaning, which types of crypto arbitrage trading exist and how to find a perfect strategy. 

What is online cryptocurrency arbitrage?

Inter-exchange cryptocurrency price arbitrage is a comparison of the value of cryptocurrency assets on exchanges. For example, a trader monitors the value of BTC on trading platforms and discovers that on Binance, BTC is worth $ 10,000 per coin, on Bittrex – $ 10,100. If an investor has the necessary capital, he can buy BTC on Binance to sell on Bittrex to earn $100. Thus, clear profit is the difference between price rates minus commissions.

Types of crypto arbitrage trading

There are two types of arbitrage trading:

  • intra-exchange;
  • Inter-exchange.

Also, approaches can be classified according to strategies used: covered interest arbitrage, betting arbitrage, futures arbitrage, NSE BSE arbitrage, interest arbitrage, merger arbitrage, reverse cash and carry arbitrage and risk arbitrage.

Intra-exchange cryptocurrency arbitrage

Intra-exchange arbitrage of cryptocurrency rates is a comparison of the rates of various crypto coins within the exchange in order to exchange cheap cryptocurrencies for expensive ones and make a profit.

Here’s an arbitrage example. A trader has $10,000, converts them on the exchange and buys 200 Litecoins. Exchanges Litecoins for Bitcoin, which costs $ 10,200 per coin. Then he withdraws the money, leaving two hundred dollars for himself as a profit. But don’t forget that In practice, the investor will receive about $180, since $20 will be spent for commissions.

The main advantage of intra-exchange arbitrage over inter-exchange arbitrage is that the trader’s commission expenses are lower, and the investor does not have to transfer money between trading platforms.

Another problem posed by single-exchange arbitrage trading strategies is a long deposit and withdrawal of money. It can take several hours or even days to get money on the exchange or transfer it to fiat. During this time, the cryptocurrency rate can change dramatically, the investor will incur losses.

By trading within one exchange platform, such risks can be avoided, but here, the trader faces another difficulty – internal monitoring. Exchange employees are trying to find the inconsistency of the rates and seek to eliminate them faster. Sadly, making a fortune on intra-exchange arbitrage is unlikely for beginners.

Arbitration between cryptocurrency exchanges

While the first option involves analyzing prices and concluding transactions within a single platform, arbitrage between platforms consists in monitoring prices on various trading platforms in order to purchase crypto cheaper and sell at a higher rate.

The main advantage of inter-exchange international arbitrage is that it is easier to find the discrepancy between the rates on different trading platforms than within a single one, where they try to prevent the spread of prices.

With arbitrage in foreign exchange market, you can find the most profitable rates for buying and selling crypto on your own, but it is quite difficult. You will have to spend hours trying to find the most suitable courses. It makes sense to simplify earnings on cryptocurrency arbitrage using paid cryptocurrency signals or automatic cryptocurrency arbitrage via trade advisors or special sites.

A trading bot is an aggregator that combines many technical analysis indicators and has the ability to compare prices on multiple platforms. It is even capable of triangular arbitrage (when at least three exchanges are involved). A trader can set up some of the trading robots on his own. Others work exclusively according to the algorithms set by the developers.

Getting lost in choice? There is no such thing as the best bot for crypto arbitrage. Trading advisors differ in their functionality. Which one to choose depends on the goals and objectives of the trader. When it comes to crypto arbitrage, there are several most popular online robots today:

  • Centobot;
  • Gekko;
  • Haasbot;
  • Gunbot;
  • CryptoHopper;
  • 3 Commas;
  • Empirica.

As noted above, bots are not the only way to automate arbitrage in stock market. Aggregators with price rates are a great tool for manual arbitrage. Such websites analyze prices on the most widespread platforms, including KuCoin, Huobi, Cryptopia, Poloniex, Kraken, etc. The service does not charge a subscription fee from customers, but earns on commissions.

To sum it up, the commission for the deposit / withdrawal of cryptocurrency and the duration of the exchange process are the largest problems with inter exchange. These factors can significantly reduce profitability or even lead to losses through the process of crypto options arbitrage.

Tips for crypto arbitrage trading

There are a few things that should be taken into account when you start trading:

  • Liquidity problems. Always keep this in mind before you start using cryptocurrency arbitrage. If you cast a look at the market, the most profitable trades in most cases are seen on altcoins, where the trading volumes are minimal. Therefore, it will be difficult to open a large volume in order to get a visible profit, especially since there is a high competition. The coins available in circulation should be selected quickly.
  • The market is changing rapidly. Discrepancies in prices are quickly eliminated, so cryptocurrency arbitrage strategies should be performed as quickly as possible, and preferably at the same time on all involved platforms. If you start transferring funds between wallets, commissions add up – they might devour all your profit. If you want to try day crypto currency arbitrage, deposit the required amount of money to all exchanges and keep tracking the market.
  • Order confirmation delays. The time of transaction performance can become the “bottleneck” of the entire scheme, especially for Bitcoin and Ethereum networks. So it is better to top up multiple deposits than trying to transfer funds, especially in the middle of the day.
  • Consider using algotrading. Switching trading to automatic mode can be very profitable, especially in arbitrage.
  • Scalping strategies bear an increased risk. The volatility of digital currencies is higher than of other assets, so if you want to try short-term arbitrage, it can be done only within a single exchange when slippages and price swings do not tend to change unpredictably. So, if there is a possibility of short-term trades, use it – volatility will allow you to earn even in this case.

But, despite all the difficulties of starting, cryptocurrency arbitrage brings more income

Arbitrage is one of the activities that a trader can perform in the cryptocurrency market.

In order to develop option arbitrage strategies, a trader is constantly looking for the gap between prices on various markets, the same can be done using a smart trading terminal and bots for crypto trading.

Thus, by combining a cryptocurrency arbitrage bot with a manual strategy, you can make a nice profit. Having up-to-date signals at your disposal, you can purchase crypto on one exchange (where the virtual currency is quoted at a lower price) and sell it on another market at a higher rate.

Bottom Line

While the entire arbitration strategy can be implemented on one’s own, it is much better and more efficient to use arbitrage trading software. An arbitrage trading bot will reduce the need to use and implement these strategies manually. It executes the strategy of an investor automatically – there’s no need to scan the market 24/7. 
With the help of a bot for statistical arbitrage, a trader doesn’t have to search for different exchanges and compare asset values – it’s done automatically. With the help of a trading chart, trading software helps visualize prices on different exchanges. Hence, the entire arbitration transaction process can take only a few minutes.

Amar Rupinder Gupta

Indian analyst in the field of trading in the forks and binary options markets. Writing about the successes and failures of banks, investment companies, and major traders. Stories about fraudulent schemes in investing and market news. Lessons in investing and portfolio management. Graduated from ICFAI University.

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