Crypto Arbitrage – Still a Profitable Venture?
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Since the introduction of Bitcoin in 2008, the cryptocurrency industry has seen the introduction of thousands of other digital currencies, in other words, altcoins. Keeping up with the constant changes in prices have been a lot of hectic work for most users. It is not an easy job to monitor thousands of coins and their price changes. This aspect has seen many traders making wrong investment decisions leading to massive losses. The volatility has also seen the rise of various trading schemes, some legit and some designed to loot from unsuspecting users. Some of these schemes include trading bots, that purport to do everything for traders, helping you to save time and make a passive income.
There are also a lot of exchanges or markets from which you can buy digital currencies. Having such markets has brought about trading arbitrage where traders try and take advantage of the differences in price. In this article, we will look closely at what cryptocurrency arbitrage is and ways in which you can make profits or losses.
What is Arbitrage?
In economics, arbitrage is simply the act of taking advantage of the difference in price of equities, stocks, commodities or bonds in different markets in an attempt to short one against another to make a profit. The difference in price between the markets is usually the profit. Arbitrage is possible because of market inefficiencies. Ideally, arbitrage is supposed to be a risk-free profit-making venture after deduction of transaction costs. However, in actual practice, a lot of factors like price fluctuations and currency devaluation come into play that leads to reduced profit margins or sometimes even losses.
If for instance a stock of a particular company X is selling at $30 in the London Stock Exchange (LSE), while at the same time the same stock is going at $30.04 in the New York Stock Exchange (NYSE), a trader can take advantage by buying from the LSE and at the same time selling at the NYSE for as long as the difference in price remains. Each trade earns the trader 4 cents per share. This example is a simple case of arbitrage.
There is a complex form of arbitrage called triangular arbitrage. In this case, you can convert a particular currency to another at one bank, then move on to a second bank and convert that currency to another, and then move to a third bank and convert the third currency back to the original one. This type of arbitrage requires a very keen analysis of the exchange rates and fast transaction time to make a profit.
What is Cryptocurrency Arbitrage?
Arbitrage in cryptocurrency follows the same concept, only that it happens in a very short time. You can even sometimes buy and sell simultaneously to make a profit. you can find a particular coin that is selling at $6 on exchange A, selling at $6.7 on exchange B and selling at $5 on exchange C or even selling via bitcoin on exchange D at $7.
The difference in price of this same coin should be the profit, but there are other factors that you must consider before carrying out a transaction. Check the deposit and withdrawal fees of that coin in the different exchanges, check the fees for trading the coin and any possible blockchain network fee. Geography is also another important factor to consider when arbitrating. You will find price differences in different countries or regions due to the factors of demand and supply as well as the different trading environments. Some coins are more valued in some countries than in others. There is also the issue of laws, regulations and policies in different countries.
Another opportunity to arbitrage that often goes unnoticed is the Listing Arbitrage. When new coins are listed on prominent exchanges, they tend to shoot up in price due to demand on the exchange. If you can identify such coins and keep up with their trend, then you can make some good profits.
How Cryptocurrency Arbitrage Work?
Just like we’ve mentioned above, cryptocurrency arbitrage involves buying a particular coin from one exchange at a cheaper price and then selling the same coin on another exchange at a higher price than you bought it. The profit is the difference between the prices in the two exchanges less all the expenses involved in the transaction. If you want to identify crypto arbitrage opportunities, there are apps you can download to alert you of new coins’ listing on popular exchanges such as Binance.
Right now, there are 170+ exchanges in which digital coins can be listed. The large distribution of the costs of these coins over all of the exchanges present good opportunities for crypto arbitrage. However, you will need a detailed analysis to identify the best opportunities in which case you can use crypto arbitrage bot.
Should you Try to Arbitrage Crypto?
Arbitraging comes with its benefits and risks. If you happen to have some extra cash or bitcoins, and have identified two exchanges with significant price differences, then you can try to arbitrage to make some money.
There are, however, some limitations that might even lead to you making a loss. For instance, it takes an awfully long period of time in some exchanges to have your transaction confirmed. Considering cryptocurrencies volatility, the price might shift to your disadvantage. There are also fees (deposit and withdrawal) that can eat into your profit if you so happen to make a profit. You should also check the allowed trading volume in the exchanges you want to use. Some allow trading up to a certain fixed amount. You might not be able to cash out all of your coins if your coins exceed the threshold. An exchange can also have a poor reputation. Such exchanges make it very difficult for you to withdraw your money. Take note of that before going in on a trade. In general, arbitraging crypto is an unpredictable and difficult venture. Learn all the rules and be very vigilant.
Crypto Arbitrage Bot
Considering the numerous exchanges available and the volatility of cryptocurrencies, it would be easier to user crypto calculators to determine possible profits and crypto bots to analyze the exchanges for the arbitrage opportunities and even carry out the transactions.
Arbitrage bots are computer programs designed to automatically analyze the numerous exchanges and the coins listed to identify those with price differences. The bots make it easier for you since analyzing these exchanges can be time consuming and hectic task.
If Crypto Arbitrage is so good-why everyone’s not doing it?
On paper, crypto arbitrage sounds good and easy. It seems like a very easy way of making some money (or even a lot of it). When you get into the actual trading, that is when you realize the impediments involved with this kind of trading. Let’s look at these impediments in details.
There are various fees involved when dealing with cryptocurrencies. You will need to deposit some money to buy your preferred coins. Some exchanges charge a fiat deposit fee. You will also incur a transaction fee when converting your fiat currency into digital currency. The process of transferring those coins from one exchange to another so that you sell at a higher price will also cost you some money. After you sell your coins in the next exchange, you will be charged a commission for that transaction. You will also incur the withdrawal as well as the fees for your payment options.
All these expenses will significantly eat into your profit; thus, you need a large volume to make and significant returns. If your margin is small, you might end up using up all your profit covering for the expenses and end up with nothing or even end up spending your initial investment.
You don’t trade market orders, you trade limits
Market orders change very quickly. You might end up with a bid twice as high as your intended price hence making a serious loss. Trading limits allows you to set your own price where you can buy or sell. This feature protects you from incurring huge losses.
Time in cryptocurrency arbitrage is of essence. In fact, it plays the most significant role. Once you analyze the charts and decide to arbitrage on a given coin, you have to consider the speed at which you enter and exit the trade. If an exchange takes 24 hours to confirm your transaction, then that would be a very risky venture since crypto prices change in seconds.
There is also the issue of network transaction time. For instance, bitcoin transactions take a lot of time to get confirmed in the bitcoin network. The best possible trade is when in which you execute both the buy and sell order simultaneously.
Volatility of coins is inevitable
Coin prices change every minute. If the currencies you decide to trade in are stable, then you can make a profit if you are in luck. Both currencies should still show some level of volatility as lack of it on the chart indicates that there are no opportunities of making a profit. Problem arises if sudden fluctuations hit the market which is common in cryptocurrency industry.
In a Nutshell
Considering all the limitations we’ve identified, we would not encourage crypto arbitrage. It is a tedious and risky process. Even though there are a few opportunities of making some real money, there are way too much limitations to put into consideration that makes this venture unattractive. If you have some money or coins to spare, you can go ahead and analyze the exchanges for possible opportunities. It is not guaranteed that you make good money, but that does not mean that you cannot try.
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