Crypto Arbitrage: Overview, Trading Strategies, Opportunities

Investing in cryptocurrency can seem like a huge endeavour if you’re just starting out. Even those who consider themselves seasoned traders still have a lot to learn, as the market is always changing and new strategies, software and even coins are released seemingly daily. For many, it can be difficult to stay on top of the most profitable methods.

The good news is that there are some great apps out there, platforms that support all kinds of trading/coins and also existing strategies that can make the entire process simpler. With this in mind, we’re focusing on cryptocurrency arbitrage, an investment method that allows investors to buy on one exchange and sell on another for a better price.

Overview:

How to use crypto arbitrage for profit

As there are so many digital coins out there and hundreds of exchanges that support trading them, it’s not hard to see the potential of buying low and selling high - and this could be done in minutes.

Price variations happen often enough across exchanges, so there’s potential for ongoing profit for those with the time and dedication. As with any crypto endeavour, arbitrage won’t be entirely risk-free (digital currencies are volatile after all), but plenty of investors prefer the risk/reward ratio of this strategy to others.

Can you make significant gains by buying and selling coins across exchanges?

One of the most attractive things about cryptocurrency for investors is the fact that they are decentralized. This means that they are not governed by the same rules and regulations as fiat currencies. As prices are based on an array of different factors, exchanges can set the ones they want at any given time to remain relevant in the market. There are often huge fluctuations in the prices of coins - and there’s not always good reason to justify which ones are popular or why they should be priced in such ways (for example, newcomers to the market can be priced higher than more well-established coins at times).

Strategies:

Spatial arbitrage

This is the simplest crypto arbitrage strategy out there, as it refers to the core principle of this form of trading. This is where you buy on one exchange and sell on another. There can be pitfalls when opting for spacial arbitrage, as transfer times can impact profits and platform costs need to be factored in (like trading, transfer and transaction fees).

Spatial arbitrage (no transferrals)

As transfer costs can play a role in how much a trader can potentially make, it’s important to keep these in mind. Many seasoned traders prefer to minimise these by sticking to one exchange and holding their coins until prices improve. This strategy may still be subject to trading costs, however.

Triangular arbitrage

This form of arbitrage requires traders to buy and sell different currencies on the same exchange, and this usually requires three steps (hence the name). What traders do is buy one coin, trade it for a lesser-valued one, then again for a higher-valued one. Once this is done, they buy the original coin once again, hopefully at a profit.

Opportunities:

Some crypto exchanges offer better rates, more trading pairs and higher trading volume than others. This means that supply and demand varies wildly, offering those trading with crypto arbitrage so many worthwhile opportunities, right at their fingertips.