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The words "cryptocurrency" and "bitcoin" evoke different feelings and associations for everyone. Despite a variety of perceptions, it is difficult to find even one person who has never heard of these two phenomena. Along with the popularity of bitcoin, the number of those interested in crypto trading is also growing.

The number of exchanges, that is, digital platforms where traders buy and sell cryptocurrencies, is constantly increasing too. Today, there are over 300 exchanges revealed on CoinMarketCap, and hundreds of others are still in their start-up phase. Given such a large amount of exchanges, it is not hard to guess that the cryptocurrency rate on each of them will be different. And that's where crypto arbitrage comes from.

What do we mean by crypto arbitrage?

Crypto arbitrage is no different from any other type of arbitrage. The point is as follows: if the price of the same item varies in two different places, you can make a profit by buying it at a lower price in one place and selling that item where it costs more. Crypto arbitrage works the same way, only the “item” is cryptocurrency.

There are types of arbitrage which imply different trading methods: spatial and temporary. Spatial arbitrage means transactions are conducted in different markets at the same time. When using the second type, traders perform operations in the same market, but at different periods of time.

Spatial arbitrage remains more popular and, in turn, has several forms. The most famous of these are arbitrage betting, triangular arbitrage, and statistical arbitrage. Global cryptocurrency traders widely practice these three methods.

Concerning arbitrage betting, it is quite clear that the bookmakers could not ignore the growing popularity of cryptocurrency and therefore they also started accepting bets and payments in the form of bitcoin.

Participating in triangular arbitrage, or cross-currency arbitrage means taking advantage of the price mismatch between three different currencies. Once there is market imperfection, a profitable trade becomes possible. However, this type of arbitrage is a rare opportunity available only to those traders who use advanced computer programs with a special cryptocurrency trading bot that automate the entire process.

Statistical arbitrage is a quantitative approach to trading that often involves mathematical modeling. This method profits from price discrepancies that sometimes only exist for a short period of time, so it is quite risky.

What do you need for successful trading?

Experienced traders are definitely more likely to profit from crypto arbitrage, but beginners with quick reaction and mathematical knowledge have chances to succeed as well.

Cryptocurrency arbitrage is often done manually by tracking price differences across multiple markets. It’s a good idea to create a comparison table of the same cryptocurrency on two exchanges and monitor the occurrence of price differences. When a sufficient difference is reached, the trader grabs a deal: they buy a token on the exchange at a lower price and sell it on the exchange at a higher price. However, things are not as simple as they seem.

If you carry out transactions manually, it will be extremely difficult to stay ahead of the competitors that operate cryptocurrency trading platforms. These computer programs contain a built-in arbitrage crypto bot and thus uncover numerous arbitrage strategies and allow traders to automatically track prices and execute transactions.

Generally, there are two options: to participate in cryptocurrency arbitrage manually, relying on your own knowledge and skills, or to delegate the entire process to a crypto trading platform. Before doing that, however, do research about the company that created the platform and read reviews from users.

Tips on how to avoid risks while participating in arbitrage

Cryptocurrency arbitrage is not a risk-free process. Constant market volatility, transaction fees, scammers, legal, technical and financial hurdles are the things to take into account before diving into the game. Cryptocurrency rates on different exchanges are growing and falling rapidly. Plus, given the time it takes to make a decision and perform the actual transfers, the arbitrage opportunity may disappear by the time you’re ready to grab it.

However, there are still strategies to help you take advantage of arbitrage opportunities.

  • Before starting crypto arbitrage, check the commissions on each exchange and calculate your costs and potential profits. Otherwise, you may end up getting zero profit or even lose money.
  • Check if the wallets of the exchange are online or disabled.
  • Since this area is also not immune to scams, sending a small transaction first will minimize risks.
  • Splitting a large trade into smaller ones reduces the potential profit, but it still carries less risk. So consider breaking your transaction and perform one at a time.
  • Cryptocurrency arbitrage is a time-limited opportunity as cryptocurrency market conditions can change in a flash. Using arbitrage tools like platforms with bots is a must because they can create a detailed plan, collect data, search profitable rates, and grab the most beneficial deals quickly.

If you are firmly convinced that this way of generating income is for you, do research on crypto arbitrage methods, assess your risks and opportunities, and learn about platforms that will speed up the process.

 

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