Cryptocurrency arbitrage is a strategy of earning on the price difference of crypto assets. A trader can use a single coin or multiple coins for this purpose. Arbitrage can be done manually or with the help of specialized programs. To perform arbitrage, a
trader needs to create and set up accounts on all platforms where they plan to earn. During trading, they need to look for coins whose prices differ on different exchanges or in different pairs.
There are several types of cryptocurrency arbitrage for earning on exchange rate differences.
1. Inter-exchange arbitrage
This is the most popular way to earn on cryptocurrency exchange rate differences. The more platforms are used for inter-exchange arbitrage, the easier it is to find significant discrepancies in quotes.
It is quite difficult to independently track the situation on different exchanges and coins. That is why traders use bots and programs to automate inter-exchange arbitrage.
Such bots are capable of independently analyzing hundreds of trading pairs on dozens of cryptocurrency exchanges (centralized and decentralized). Statistics show that up to 99% of arbitrage deals are made through trading programs.
Traders also sometimes buy signals for arbitrage trading. In this case, the bot or program provides notifications on which cryptocurrencies and on which exchanges to buy or sell.
The difficulties of inter-exchange arbitrage can include the following factors:
Limitations from trading platforms. Exchanges that are under regulators' control can track suspicious activity and block it. The possibility of withdrawal delay from the exchange. Any operations that take time in the arbitrage process increase the risk of profit reduction or losses. This factor is neutralized by using long and short orders. The need to consider transaction fees and inter-exchange transactions. They reduce the profit from the difference between the purchase and sale price. Incorrect bot operation. A program that automatically opens orders affects the trader's profit and loss. In some cases, a bot may start making losing trades. If it is not disabled in time, losses can reach up to the full deposit amount. The key advantage of inter-exchange trading is the ability to make a profit with almost no risk. For arbitrage, a normal profit from a single chain of transactions is considered to be 0.01%, but with intensive trading, it is possible to earn even higher income.
2. Intra-exchange arbitrage
Intra-exchange arbitrage involves a series of trades within a single platform, using at least three related trading pairs. Profit is earned through sharp price differences.
For example, consider the following hypothetical assets:
Cryptocurrency X is worth $1000. Cryptocurrency Y is worth $100. In this case, 1X will be worth 10Y. However, during a sudden increase in trading volumes in the X/Y pair, the price may jump to a value of 1X = 11Y. At the same time, the prices of both assets in fiat equivalent may remain the same.
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In such a situation, a trader can conduct a series of trades:
Buy 1 coin of X for $1000.
Exchange 1X for 11Y.
Sell 11Y for $1100.
Thus, the trader's earnings from intra-exchange price differences amount to $100.
Considering the expenses for commissions, intra-exchange arbitrage is more advantageous than working with multiple platforms, as there is no need to pay for the transfer of funds between them.
Another advantage of this type of arbitrage is that the trader does not waste time on transactions between exchanges. Therefore, trading in the format of intra-exchange arbitrage allows for a maximum response to market changes.
A significant disadvantage of intra-exchange arbitrage is the restrictions imposed by the exchanges themselves. They constantly analyze quotes to identify correlation between prices. The identified differences are quickly eliminated, which often results in zero profits from arbitrage.
To increase overall profits, it is better to combine inter-exchange and intra-exchange arbitrage.
3. Multicurrency inter-exchange arbitrage
This trading method combines intra-exchange and inter-exchange arbitrage, where multiple cryptocurrencies and exchanges can be involved in transactions.
For example, a trader can execute the following series of transactions:
Buy ETH for USDT on exchange A.
Exchange ETH for BTC on exchange B.
Sell BTC for BUSD on exchange A.
Such chains of transactions are quite difficult to identify and conduct manually. Therefore, the use of bots is particularly relevant for them.
4. Working with different markets
Experienced arbitrage specialists can make trades between the spot and futures markets.
Different contracts are used when opening positions on futures - perpetual, monthly, quarterly, etc.
This type of arbitrage yields significant results during strong market movements. Trades are usually made when news impulses are formed. At this time, there may be a significant difference between the spot price and the contract rate.