There are many ways to potentially invest in and use cryptocurrency, including crypto arbitrage. If you are new to this concept, there are a few things you should know about arbitrage between crypto exchanges before you get started.
Basics of Crypto Arbitrage
At its most basic level, cryptocurrency arbitrage is making a profit from the fact that not all exchanges will list cryptocurrencies for the same price. You can do arbitrage crypto trading between more than one exchange. You could also use just one exchange and do triangular arbitrage.
To add a bit more detail, crypto arbitrage involves buying a specific cryptocurrency on one exchange then immediately selling it on another exchange where it lists for a higher price. This is one method of buying low and selling high to make a profit.
With crypto arbitrage, speed is a major priority.
Types of Crypto Arbitrage
There are several different methods of arbitrage crypto trading, depending on your overall strategy and actions:
- Arbitrage Between Crypto Exchanges (Spatial Arbitrage): This is the above situation, where you buy crypto on one exchange, move it to another, and sell it there. It has a few issues, including the transfer can sometimes take longer than spreads last, and the transfer fees can detract from your profits. Some traders hold crypto on multiple exchanges to reduce such issues.
- Cross-border Arbitrage: This refers to any type of crypto arbitrage that takes place on exchanges that are in two different countries.
- DeFi (Decentralized Finance) Arbitrage: This is crypto arbitrage using DeFi, which is a non-custodial financial protocol that works as an exchange, stablecoin, and lending protocol. They are code-heavy.
You can follow one of several strategies with this type of arbitrage. One option is to look at the differences in yields from lending with DeFi protocols. Or it can follow the same method as arbitrage between crypto exchanges. You can also use trading bots to get ahead of other traders with higher gas fees to take advantage of the price gap while it is still widest.
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- Flash Loan Arbitrage: This uses flash loans, which are instant crypto loans that let traders borrow crypto in large quantities without collateral. Some people will use this by taking advantage of variations in interest rates from providers of flash loans.
- Statistical Arbitrage: With this method, you use quantitative data models and a crypto arbitrage bot to trade your cryptocurrency. The bot lets you trade hundreds of cryptos simultaneously. The bot uses a mathematical model to determine the chances of profits and then makes the appropriate trades based on those calculations.
- Triangular Arbitrage: This is arbitrage on just one exchange that involves three cryptos. You don’t have to worry about transfer fees or the time spent transferring the crypto, as it all occurs on one exchange.
This is a bit more complicated as three cryptocurrencies are involved. It essentially takes advantage of a single cryptocurrency being undervalued on the given exchange. So, assume cryptos A, B, and C are involved. A trader would sell crypto A for crypto B, then sell crypto B for crypto C, and finally buy crypto A with crypto C. Theoretically, they should end up with more of crypto A than in the beginning.
Is Crypto Arbitrage Legit?
With some caveats and a proper understanding of the risk, crypto arbitrage can be legit. The important thing to remember is that you can make a profit from it. You also need to have the proper resources and strategy to do so. However, there’s also a chance you won’t make a profit.
How to Do Crypto Arbitrage
Doing crypto arbitrage is as straightforward as it sounds:
- Register on multiple exchanges ahead of time to make transfers easier and save time.
- When you see an opportunity, buy the crypto on the exchange with a low price.
- Transfer the crypto to the exchange with the higher price.
- Sell the crypto on the new exchange for fiat.
- Enjoy your profit.
How to Make a Profit With Crypto Arbitrage
It is theoretically possible to make a profit with crypto arbitrage if you do it manually, but you typically need to use a bot to increase your chances of success. That is the only way you can accurately see listings across exchanges at all times, including when you are asleep.
What Are the Risks?
Crypto arbitrage trading is not without its risks. You will have to keep the following potential risks in mind if you plan on using this strategy:
Gains Are Small Without High Volumes
Because of the nature of crypto arbitrage, you will typically only see very small profits for each arbitrage opportunity. As such, you need to have a higher volume of crypto and available capital to see profits on the scale you likely want.
As mentioned, you have to act fast with crypto arbitrage. Prices can move very quickly, and opportunities can disappear within seconds. The rise of crypto arbitrage bots only adds to this issue, as it increases the competition.
If you own cryptocurrency, you hopefully know that you should not store more than you need to on a crypto exchange, as that is among the riskiest places to store it. However, having all of your crypto on one or more exchanges will increase your chances of success with arbitrage. As such, you need to balance the security risks with the potential rewards.
This refers to when your order is not processed right away, so you end up buying or selling at a different price than intended. It can happen if your order is bigger than the order book’s cheapest offer, resulting in you paying more than expected. That could reduce or even eliminate your profits.
We already touched on transfer fees if you are using cryptocurrency arbitrage between exchanges. This can be an issue, especially because of the tight spreads most crypto arbitrage trading deals with.
How to Reduce Risks With Haru Invest
You can reduce the risks of crypto arbitrage while taking advantage of the potential benefits by letting experts like those at Haru Invest handle it for you. Haru Invest lets you earn interest on your crypto without any management fees. You don’t have to look for opportunities as the Haru team created an automated system that monitors the market 24/7. It automatically uses arbitrage and other methods to generate a profit with no effort on your part.
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To give you an idea of what is possible with Haru Invest, consider the latest performance numbers. The biweekly return for the Earn Like the Best (BTC) account from March 16-31, 2021, was 0.9056%. For Surf with the Volatility (USDT), it was 0.6441%. Annualized, these are 20.66% and 14.69%, respectively. The figures are better than most individuals, especially beginners, would get with arbitrage.