If you are into cryptocurrency trading, you must have heard of crypto arbitrage and probably want to know more about it. Crypto arbitrage is one of the most effective and safest methods in the market to make profits trading cryptocurrencies.
When you buy a specific cryptocurrency from one exchange, and sell it to another at a higher price simultaneously, you make a profit with the margin. This is called Crypto Arbitrage. Trading highly valuable assets like cryptocurrencies are perfect for arbitraging due to the price inconsistency from different exchanges. But, it’s not as straightforward as it sounds.
There are several points you need to keep in mind while trading. In this article, we will explain how to make more profits with crypto arbitrage.
Understand and monitor the markets
Understanding how the markets work and monitoring them consistently is the best way to gain on arbitrage. The price differential of cryptocurrency can be significant across the exchanges, providing traders with legit opportunities to take advantage of inconsistent pricing.
You need to keep an eye on the prices for the same currency. When you find a good price difference between exchanges, you can transfer your coins to grab the profit. Nowadays, mobile applications are also available so that you can monitor the markets on the go.
Moreover, you can even choose bots designed to track price variations if you don’t want or have time to do it manually.
Gain Profit with Cross-exchange Arbitrage
Cryptocurrencies are mostly traded between two or more exchanges. This is because it is very similar to the forex arbitrage. The basic idea is to earn profit from the differences in price for the same crypto, but on different exchanges.
Suppose, the price for any crypto in exchange 1 is $7000 (USD), whereas in exchange 2, it is $7500. You can buy a coin from exchange 1 for $7000 and sell it to exchange 2 in $7500, making a profit of $500 in a single transaction.
Sounds simple, but there are some important factors which you need to consider, such as - trading fees, withdrawal fees, counterparty risk, etc. You need to pay a small fee for each of the following actions you perform on exchanges:
• transferring money from outer wallet to the exchange
• buying any cryptocurrency on exchange 1
• transferring the crypto from exchange 1 to exchange 2
• selling the cryptocurrency on exchange 2
• withdrawing the money from exchange 2
There is no use of trading the coins if the cross-exchange difference is lower than 2%. The goal is to look for an arbitrage which leads to 2% profit or more, as it will cover up all the transaction costs and transfer fees.
Gain Profit with Intra-exchange Arbitrage
Intra-arbitrage is done by the triangular arbitrage and involves gaining profit with the price differences between three currencies on the same exchange. As it focuses on one particular exchange, it cuts out the cost of transferring crypto from one exchange to another.
For example, you can buy 10 ETH with USD that will cost you $2856. You can use this ETH to buy BTC. 10 ETH will get you 0.28 BTC. You can now convert this BTC to USD. 0.28 BTC will yield $2890, leading to a profit of $34.
Intra-exchange can also lead to fair profits, even if it’s more challenging to find opportunities within the exchange. The catch here is to make several large volume conversions, which will not only cover up the deposit and withdrawal fees, but may also qualify you for attractive fee discounts.