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Crypto can be intimidating when it comes to arbitrage trading. As you become a seasoned veteran, you’ll level up your skills and trades. Be patient and keep learning.
If you’re looking to start taking advantage of these crypto arbitrage opportunities, you’re in the right place. Read our guide below to get started.
What is cryptocurrency arbitrage trading?
A cryptocurrency arbitrage trade involves taking advantage of a difference in price between cryptocurrencies listed on different exchanges. By buying and selling digital assets simultaneously, traders can profit from price differences between two or more markets.
Trading involves buying and selling the same cryptocurrency simultaneously on different platforms, so traders must access multiple exchanges. If done correctly, this form of crypto trading can bring in attractive profits with minimal risk. It is important to be aware of the costs associated with this type of strategy, as well as the potential rewards.
Arbitrage Trading Opportunities in the Cryptocurrency Market
There are plenty of crypto arbitrage trading opportunities at your disposal. Let’s discuss some of the more popular options available.
Pure Spot Arbitrage
By buying one crypto asset in one market, you can turn right around to sell it for a profit in the next. The gaps won’t last long, so you’ll need to be fast. This of course comes with a certain level of risk.
For example, when a coin like Filecoin was listed on exchanges, some had it priced at $30, while others had it listed at $200.
When you do pure spot arbitrage, speed will work against you. While spreads will only last for seconds, transferring between exchanges takes minutes.
Aside from speed being a concern, fees will be another one when you withdraw or deposit.
A savvy trader can circumvent these issues by holding cryptocurrency on two different exchanges. By doing so, they can buy and sell crypto at the same time.
An example of this would play out if a trader has $30,000 in a stablecoin on exchange X and 1 bitcoin on exchange Y. When bitcoin is priced at $30,200 on exchange Y and only $30,000 on exchange X, the trader would buy bitcoin (with the stablecoin) on exchange X and sell the bitcoin on exchange Y.
The trader would profit $200 because of the spread between exchange X and exchange Y.
Triangular arbitrage is where you take three different cryptos and trade the difference among them on an exchange. This right away cuts out transfer fees.
One or more cryptocurrencies may be undervalued on an exchange. A trader sees this as an advantage by selling one crypto for a second and then buying a third crypto. The goal is to have more of the first crypto before starting.
A positional crypto arbitrage is similar to a spot crypto arbitrage. The difference is that there is no exchange of ownership (fiat and crypto).
The arbitrage crypto opportunity presents itself by opening positions on the exchange. Once the prices are the same, then the profit is realized.
For instance, you would open a position by “going long” while also opening another position by “going short.” This takes the place of selling at the other exchange.
Decentralized Finance (DeFi) and Decentralized Exchanges (DEXs)
DeFi is a catch-all term that refers to non-custodial financial protocols. These protocols function without human intervention (lending protocols, stablecoins, exchanges, etc.)
Borrowing and lending are offered by most cryptocurrency exchanges. The rates are all determined by the users’ supply and demand.
Learn: Bitcoin lending
This presents a unique arbitrage crypto opportunity!
You can borrow at a lower rate from exchange X and lend at a higher rate from exchange Y. This is a rather riskless profit.
For example, let’s say you borrow bitcoin from exchange X at .17% and lend it to exchange Y at .88%.
Depending on which exchanges you use, you should be able to move fiat as well as have crypto used as collateral.
Arbitrage Trading Bots
Quantitative data models are used as trade methods. This is done via a statistical arbitration bot. A bot would trade hundreds of cryptocurrencies simultaneously in the hopes of profiting from going long or short.
A bot will give a high-performing crypto a low score and a poor-performing crypto a high score. Bigger profits can be made with higher-performing cryptos.
Learn: Crypto arbitrage trading bots
Good bots know how to predict price and trade, taking advantage of price discrepancies using these mathematical models.
How to Begin Cryptocurrency Arbitrage Trading
The beauty of crypto is that anyone can begin right away. You don’t need anyone’s permission to do so. Once you have found a crypto arbitrage strategy you like, try it on for size.
Learn: Crypto algorithmic trading
You should keep an ear and eye on the crypto markets to be able to detect and capture those golden cryptocurrency arbitrage trading opportunities. We recommend learning python for algorithmic trading.
Get automated arbitrage trading done by experts with Haru Invest
Haru Invest is a digital asset investment platform that offers an interest-bearing crypto deposit service and fund service. Haru Invest lets you earn interest on cryptocurrency.
Unlike other similar CeFi platforms out there, Haru Invest does not operate in the lending model. Instead, Haru Invest invests crypto assets with high frequency trading, exploiting the gaps between crypto spot or derivative exchanges. With this different way of generating returns, Haru Invest has been consistently paying out earnings with minimized risk.
Some of the strategies that Haru Invest works with include :
- Arbitrage Trading that leverages BTC and ETH price gap between crypto exchanges
- Market Neutral Strategy based on the price stability mechanism at futures exchange
- Spread Trading that focuses on the volatility of BTC/ ETH futures contract
If you want to let experts securely handle your crypto portfolio or calculate the earnings check out our Haru Earn page. Visit the Haru Earn page.
Arbitrage Trading Advantages
Compared to other trading strategies, you’ll find crypto arbitrage to be relatively low risk. This is because you won’t have open positions on exchanges.
You’ll often profit regardless of the direction of the prices and market.
You won’t need to wait long to realize your profits, either. Since price convergences happen quickly, closing your short and long positions won’t take a lot of time.
Drawbacks of Arbitrage Trading
One of the main cryptocurrency arbitrage risks you may encounter is slippage. Slippage is when a trader’s buy order is larger than the cheapest off on the order book. This causes the order to slip, which in turn causes the trader to pay more than anticipated.
With small margins, the slippage would clear the traders’ potential profits.
You also need to be aware of price movement as a potential risk. Spreads move fast (sometimes in a matter of seconds), so traders need to operate quickly to take advantage. Many traders will also use trading bots, which only adds to the competition.
Transfer fees are a concern, too. Transfer and trading fees with tight margins could clear any potential profits. A trader will need to perform a large number of trades to make substantial gains with these tight margins.
Start Taking Advantage of Crypto Arbitrage Trading Today
There’s no better time than today to start crypto arbitrage trading. As you perform your trades, you will get much better with practice.
Some strategies may work better for you than others. Feel free to try different ones to see which you like best or let experts do automated arbitrage trading for you with Haru Invest