Arbitration Trading

A profitable cryptocurrency trading strategy

Arbitrage trading in bitcoins and cryptocurrencies is becoming a popular strategy. The presence of a large number of exchanges, their decentralization, allows you to come up with different schemes of speculation and quick money. Let’s see some examples of cryptocurrency arbitrage.

For many traders, arbitrage trading in the Forex currency market has long been not a secret, but a source of stable profit. Meanwhile, such a strategy can be successfully applied in the cryptocurrency market.

We will look at the three most common arbitrage schemes with bitcoin and other altcoins and evaluate their advantages and disadvantages.

Arbitration is the performance of several transactions of purchase and sale of identical assets, the profit of which is derived from the difference in their value.

There are two types of arbitration:

  • spatial – when trading operations are conducted at different trading floors, but at the same time;
  • temporary – operations are conducted on the same trading platform, but at different times.

Spatial arbitration

The most common form in financial markets is spatial arbitrage. In simple words, his scheme looks like this: the price of the same asset on two exchanges is significantly different. A trader buys this asset where it is cheaper, and sells it where it costs more. The difference in the price of an asset goes into profit for the trader.

It is worth noting that spatial arbitration is possible solely because of the low efficiency of asset quotes within a separate trading platform in particular and the entire system as a whole. There is also a key dependence: the less the system itself is centralized, the worse the interaction between exchanges is established. Due to the fact that decentralization is at the heart of the entire cryptocurrency system, this provides an excellent opportunity for cryptocurrency arbitrage.

Scheme number 1. OTC spread

Using the cryptocurrency price difference looks something like this:

On the EXMO cryptocurrency exchange, for example, 1 bitcoin is trading at a price of $ 8,500 per coin. On the Livecoin exchange, the price of bitcoin is $ 9,000. A trader buys 1 BTC on the first exchange, transfers it to the second exchange and sells there. As a result, he makes a profit of $ 500, which is the over-the-counter spread.

Disadvantages of arbitration scheme No. 1

Ideally, everything looks great, but in practice the profit will be much less, since any cryptocurrency exchange charges a certain commission from the operations of the trader.

Commission costs

Commissions may be charged on the following operations:

when transferring funds from a personal wallet to a trading deposit on the exchange No. 1;
for depositing funds on the exchange;
for the purchase of cryptocurrency on the exchange No. 1;
for transferring cryptocurrency from exchange No. 1 to exchange No. 2;
for the sale of crypto on the exchange No. 2;
when withdrawing funds from a trade deposit on the exchange No. 2 to a personal wallet.

Traders using arbitrage operations, without fail, take these costs into account, preferring to work with an over-the-counter spread in the amount of 2-3%. Additionally, there are various ways to reduce fees.

Lack of liquidity

As a rule, the difference in the quotes of top cryptocurrencies is quite insignificant, which complicates their use for arbitration. A much larger difference in price is observed among altcoins, figuratively speaking, “second tier” coins. But here a rather serious problem appears. The liquidity of altcoins is rather low – it is impossible to buy or sell them in large volumes.

Professional crypto traders increase their profits due to large trading volumes, which, by the way, makes it possible to minimize commissions for trading and transaction operations. With many altcoins, which have an attractive difference in quotes, such a number will not work.

In addition, it should be noted that arbitration is no secret to anyone, and you are not the only one so smart and cunning. That is, if in some crypto coins there is a difference sufficient for arbitrage operations, the available volumes of such an asset are very quickly bought out. As a result, the over-the-counter spread also narrows quickly and can leave a trader without profit.

Risk of time lost

As we have already said, the essence of spatial arbitration is that the purchase and sale operations should be carried out almost at the same time. That is, the shorter the time interval between buying cryptocurrency on one exchange and selling on another, the lower the risk that the price of this asset will change, reducing or depriving the trader of profit, at best. In the worst case, such a purchased cryptocurrency will have to be sold at a loss.

You are transferring cryptocurrency from exchange No. 1 to exchange No. 2, but while you were making a purchase, unplanned technical work has begun on the second platform, which is not uncommon for cryptocurrency exchanges. Time is lost – money is lost.

In addition, the increased popularity of cryptocurrencies has led to a negative effect. Network congestion has led to the fact that the speed of transaction execution has dropped significantly. As long as your funds reach the right place, the situation on the market can radically change, making arbitrage on the chosen cryptocurrency pointless.

Scheme number 2. Use of exchange deposits

The second scheme is designed to solve the key problem of the quick transfer of cryptocurrency between the buying exchange and the selling exchange. The basis of scheme No. 2 is the storage of funds used for arbitration on deposits of crypto exchanges. Its most effective use will be when investing in the medium and long term, as well as in the “Pump and Dump” scheme.

In simple words, funds do not need to be transferred anywhere, since they are already on the necessary trading floors.

For example, on two cryptocurrency exchanges you have deposits with 2 BTC and 100 Ripple each. When an over-the-counter spread appears in a ripple / bitcoin pair, we buy XRP on the first exchange for bitcoins, and on the second exchange we sell all XRPs. After that, we align our deposits on both cryptocurrency exchanges.

The result of such arbitrage operations was a profit of 0.08 BTC.

Сonclusions

In fact, there are many more arbitrage schemes on the market. All of them, in one form or another, have already been tested on Forex. However, the cryptocurrency market, which is moving by leaps and bounds, where more than one and a half thousand cryptocurrencies are traded, with its decentralization, at the moment, looks much more attractive for arbitrage operations.