Arbitrage is the name given to the process of buying assets that seem more profitable or that can be more profitable by selling valuable assets.
The basics of Crypto Arbitrage are also easy, buying crypto from an exchange that offers the lowest price, while selling on an exchange. The main purpose of arbitrage trading in the middle of the stock market is to take advantage of price differences. However, the arbitrage opportunity is not nice there, as the buy-sell spread and trading pairs in the classical markets are small compared to what is seen in the order books of crypto markets such as Ethereum (ETH) or EOS.
How Does Cryptocurrency Arbitrage Work?
A simple arbitrage strategy works by setting up multiple accounts that are priced higher on one crypto exchange and priced lower on the other. The investor takes advantage of market inefficiency to earn profits without too much market risk. This is a well known trading strategy and it works as long as the process price is not too high.
To make the strategy work without manual calculation and practice of trading, a crypto arbitrage trader can develop a crypto bot that trades just as exchange platforms offer different price quotes for the asset.
Is Cryptocurrency Arbitrage Profitable?
For a Crypto Arbitrageur, inconsistencies in the midst of changes are always an opportunity, due to the high volatility in prices and transaction volume. Therefore, while Cryptocurrency Arbitrage is still profitable, it offers a seamless way for investors to increase their crypto holdings. Cross-border arbitrage is still a neat way to gain a good advantage in the market.
In addition, investors are scanning the market to create crypto bot systems that quickly minimize any opportunity for profit, and Bitcoin Arbitrage is becoming more and more difficult.
How to Calculate the Costs and Profits of Crypto Arbitrage
Costs and profits for the arbitrage opportunity are based on an easy calculation. It is necessary to deduct the cost of the asset value from the purchased asset. In addition, it is necessary to subtract a random process price from this profit for both the bought and sold position. The remainder is the profit of the investor.
For example, if you sell 1 BTC at $50,000 on one exchange and buy 1 BTC for $49,500 on another exchange, the difference is $500.
What are the types of arbitrage opportunities?
There are several types of crypto arbitrage opportunities. The first of these arbitrage with mid-exchange transferis.
The easiest way to arbitrage, mid-exchange transfer, involves transferring an asset purchased on one exchange to another and selling it at a higher price. However, transferring in the middle of the stock markets creates arbitrage, loss of time and additional transfer costs.
One of the other Arbitrage types is, arbitrage without transfers mid-exchangeis .
This type of arbitrage does not require crypto transfer in the middle of the exchanges and allows to act on the price difference instantly. All that is required is to hold assets on two exchanges and place a buy and sell order at the same time when the price difference is large enough.
For example, if you buy 1 BTC for $10,000 and sell 1 BTC you own on another exchange for $10,100, the difference between $10,000 and $10,100 is your profit.
Another type of Arbitrage, Triangle Arbitrage is . Triangular arbitrage requires more computation; however, many crypto arbitrage tools calculate this automatically.
In Triangle Arbitrage, the key is to choose three cryptocurrency pairs on a single exchange: ETH/BTC, XRP/BTC, and XRP/ETH. It then exchanges ETH for BTC, BTC for XRP and returns XRP to ETH back to the starting point. There should be a valuable difference in pricing in the middle of all three pairs, which is not commonly seen on major exchanges and is mostly seen in times of increased volatility. Orders given in such market conditions may not be realized at the calculated price. For this reason, you should be careful.