This guide will cover how to buy cryptocurrencies at a lower price and sell them at a higher price (arbitrage.)
Cryptocurrency arbitrage is a type of trading that takes advantage of differences in prices to make a profit. These price differences, commonly known as “arbitrage spreads,” can be used to buy a cryptocurrency at a lower price and then sell it at a higher price.
For example, if BTC ( Bitcoin ) sells for $ 8,050 on Coinbase Pro and $ 8,200 on Binance. You can buy a certain amount of BTC at a lower price and sell it at a higher price.
Different types of arbitrage take advantage of price differences in different ways. However, they all involve finding these spreads and acting quickly on them.
In 2020, the crypto arbitrage rates were spread between 0.2% and 4%. Sometimes more than 20% will appear, but they are rare.
However, if you can act on arbitrage spreads enough times in a day, it can be worth it. Arbitrage is a great tool when prices don’t move much in a day and other crypto trading strategies, like swing trading, aren’t entirely viable.
A common mistake with arbitrage is that you have to buy crypto on one exchange, transfer it to another, and then sell it.
While this is one approach, it is not your only option, and other forms of arbitrage trading do not depend on waiting for a potentially slow and expensive transfer.
Spatial arbitration: transfer between exchanges
This involves buying cryptocurrency on one exchange, transferring it to another exchange where it is traded at a higher price, and then selling it.
This is not a realistic way to profit because spreads (price differences) can only exist for a couple of seconds.
Therefore, by transferring the crypto to another exchange, the price has likely changed again.
Transfer fees are also incurred in addition to commercial fees.
- Easy to run
- Transfers are slow and expensive.
- The spread may no longer exist when the transfer takes place.
This spatial arbitrage approach eliminates the step of transferring crypto between exchanges.
So you can act immediately on savings without having to wait for a slow transfer or pay a transfer fee.
That difference makes it a better option for cryptocurrency trading compared to the transfer method.
To do this, you maintain a balance on two exchanges and submit a buy and sell order at the same time on both.
For example, let’s say you’ve seen some spreads in the BTC-USD market when buying Coinbase Pro and selling on Binance.
You would move your USD to Coinbase Pro and your BTC to Binance, then wait for a margin. When a price difference appears, let’s say it is 1.2% more on Binance, you would trade buying BTC with your USD on Coinbase Pro and sell BTC for USD on Binance.
Breaking down the example further, if you had bought 0.1 BTC at a rate of $ 8,050 on Coinbase pro, you would have spent $805.
And if you had sold 0.1 BTC at the same time on Binance at a rate of $ 8,200, you would have sold it for $ 820.
So in an instant, you bought 0.1 BTC and sold 0.1 BTC without losing or gaining BTC. But you spent $ 805 to buy it and sold it for $ 820, which made a profit of $ 15 (before trading fees).
You can keep waiting for spreads to show up like this and act on them as they appear. Order books are constantly changing, so prices are always fluctuating, and spreads can appear quite regularly.
- You can profit immediately.
- No transfer times or fees
- It cannot be easy to send two complementary operations quickly at the same time.
- You can complete one order while the other does not mean that you will not get the price you wanted; it cannot guarantee that it will be fast enough to complete both orders first.
This approach is different because it can be done entirely in one exchange. Rather than exploiting price differences between exchanges, triangular arbitrage takes advantage of differences between trading pairs.
For example, you can trade ETH for BTC, BTC for XRP, and XRP back to ETH. If price differences were advantageous, you would end up making a profit.
- It can be done in a single exchange.
- You can profit immediately.
- No transfer times or fees
- The more orders you submit, the more likely other people will complete that order instead of you, which means you won’t get the price you wanted.
For example, we will see how to find spatial arbitrage opportunities. This involves looking for price differences between two exchanges where the spread is large enough that you can make a profit even after trading fees.
You may want to start by checking which coins have had a decently high volume of liquidity or price volatility. However, that will be up to you to find what works best each day.
There are four important factors to consider when looking for spreads:
- 1. Rates
The margin should be large enough that you make a profit after the trading fees. If you pay 0.2% on your purchase and 0.25% on your sale, you will not make a profit if the price difference was only 0.1%. So you may want to only look for spreads above a certain threshold, say 1%.
- 2. Consult and bid rates
You want to be looking at the top of the order book on every exchange. By purchasing, you will complete the application order on that exchange. So, look at the fee and the order amount. By selling, you are completing the offer order on that exchange. So, look at the rate and amount of the offer order.
- 3. Avoid slipping
Slippage occurs when you don’t get the price you expected. If the last request is for 0.1 BTC at a rate of $ 8,050, but you buy 0.15 BTC, you will get 0.1 at a rate of $ 8,050. And the other 0.5 BTC at a worse rate because it will fill the order book’s next order. Your orders cannot be larger to avoid slippage than the smallest of the order or sale orders that you will be completing.
- 4. Potential profit
If there is a 30% margin, but the order you will fill is only for $ 1 of the asset, your maximum profit will not exceed $ 0.30.
Let’s say we want price differences that are> = 1% and have an order size that allows at least $ 10 of profit.
You can open multiple exchange websites and try to calculate price differences and check order sizes manually. Or you can use some software tool to help with the process.
Realistically, since arbitrage spreads can only exist for a second or less, you’ll probably want to use a tool to help with the process.
There are a few options, but the one we’ll use as an example today is Congo Terminal, which provides a real-time arbitrage scanner for several crypto exchanges and allows you to filter by spread percentage and possible profit.
How to submit arbitrage trades and take advantage of a spread
As stated above, for our example, we are doing spatial arbitrage without transferring between exchanges.
Let’s say you’ve been watching the arbitrage scanner and seen profitable spreads appear multiple times in the ETH-USDT market when buying on Kraken and selling on Bittrex.
You already have some ETH and USDT, so in the hope that this trend will continue, you can send your USDT to Kraken and your ETH to Bittrex.
Steps to submit arbitrage trade
1. Move your USDT to Kraken
2. Move your ETH to Bittrex
3. Wait for a profitable spread to appear
4. Find the smallest order quantity to avoid slippage. For this example, if the offer order you are filling is 0.1 BTC and the offer order you will complete is 0.05 BTC, the highest amount you can order is 0.05 BTC.
5. Now, you have to place both orders simultaneously on each trade, a buy, and a sell. For both orders, you will use the amount you determined, 0.05 BTC, in this example. You can open two limit orders and specify the exact price you want using the bid and ask rate for that order you are filling or open market orders.
6. If you could place both orders fast enough to fill them before they were canceled or someone else filled them, you just made an immediate profit.
7. Go back to step 3 and start over.
Speed is the key to arbitrage play; you compete to be faster than other traders and bots trying to do the same.
Your best bet for being fast enough is to use a tool that can help you act quickly on spreads as they appear.
As mentioned above, Congo Terminal can also help in this area with its One-Click-Trading interface, which helps to automatically pre-configure your order sizes and fees and send orders to multiple exchanges with one click.
Arbitrage can be a great approach to day trading cryptocurrencies, but it has its benefits and drawbacks.
The ability to make immediate profits without waiting and seeing charts is undoubtedly appealing to some. Still, the prospect of competing against other traders and bots to be the first to complete an order can be intimidating for beginners. Best of luck!
Not financial advice. For informational purposes only.