Have you just heard about Crypto Arbitrage Trading and are looking for what it is and how to get started? You’ve come to the right place! , In this post, I will show you what crypto arbitrage trading is and how you can make money with it.
Crypto arbitrage trading involves buying and selling digital assets across multiple exchanges to capitalize on small differences in the prices of those assets from exchange to exchange.
By continuously purchasing low and selling high across different exchanges, you can make a profit with minimal risk, often without even holding onto any of the assets for long periods.
What is Crypto Arbitrage?
Crypto arbitrage trading is the process of buying and selling cryptocurrencies across different exchanges to take advantage of the discrepancy in the value of a particular crypto asset.
Under normal conditions, the price of cryptocurrency across different exchanges should be equal, but due to differences in liquidity across these exchanges, the price varies. So what crypto arbitrageurs do is that they take advantage of this price difference.
Similar to regular cryptocurrency trading, the objective of arbitrage trading is to either “buy low and sell high or sell high and purchase low.” The only difference is that crypto arbitrage trading is done quickly before the price of an asset normalizes.
Forms Of Crypto Arbitrage Trading
There are many ways in which crypto arbitrage trading can be implemented. It can be accomplished by exchanging different cryptocurrencies on an exchange or by exchanging a specific asset between exchanges.
Because of the various implementation methods, crypto arbitrage trading was divided into three forms: exchange arbitrage trading, triangular arbitrage trading, and Defi arbitrage trading. Let’s explore this one by one.
Exchange Arbitrage Trading
Exchange arbitrage trading is all about getting a cryptocurrency asset on one exchange and selling it immediately on another exchange when a price difference is noticed.
For instance, the price of ETH might be 200 USDT on Binance and 190 USDT on Bybit, meaning that there is a 10 USDT price difference. What exchange arbitrageurs do is that they buy this on Bybit, quickly transfer it to Binance and sell it.
What causes this arbitrage trading opportunity across different exchanges is the difference in liquidity of assets.
Triangular Arbitrage Trading
Triangular arbitrage trading is where you take advantage of the price differences between three different crypto assets. For example, let’s say you noticed an undervalued coin among Doge, BNB, and ETH.
You can profit by using Doge to buy BNB, then using the BNB to buy ETH, and then selling the ETH back to Doge. In the end, the value of Doge must be greater than what you had at the beginning for this trade to be profitable.
Defi Arbitrage Trading
As we know, Defi is a non-intermediary crypto exchange platform where anyone can go and swap their tokens, or lend them out for some interest. It is an automated exchange with various pools that enables users to swap their coins without any human involvement.
When you swap your coin on Defi, you will pay some fees for the transaction. These fees will be used to reward the liquidity providers (those who lend their coins) provider of such a platform. This swapping is done in pools.
So, Defi arbitrage trading involves taking advantage of discrepancies that occur between different liquidity pools holding the same assets in a Defi lending protocol.
For instance, let’s say we have these three pools: Doge-USDT, USDT-USD, and USD-ETH. A Defi arbitrageur will profit from these pools by swapping them multiple times when an undervalued token is noticed among the pools.
Advantages of Cryptocurrency Arbitrage Trading
The main benefit of this strategy is that it offers the potential for high returns with little risk.
For instance, unlike in normal cryptocurrency trading, where you need to enter a contract for a price difference, which may result in liquidation.
There is a low chance of your assets being liquidated in arbitrage trading as you buy the assets and sell them immediately.
Another advantage of crypto arbitrage trading over normal trading is that you don’t need to do much analysis.
Unlike arbitrage trading, normal crypto trading involves studying the price chart and using some factors to foretell what the market will do next, which involves higher work.
Also, crypto arbitrage trading is advantageous as it can be done relatively easily, as long as you have access to multiple exchanges.
Finally, it can be a great way to diversify your portfolio and reduce your reliance on one exchange.
Challenges in Crypto Arbitrage Trading
Although crypto arbitrage trading can be considered a low-risk trading strategy, there are some other risks that, if not taken, can cause a huge loss in this trading strategy. Let’s go over them.
- The number one challenge in crypto arbitrage trading is that the market is so volatile that prices can change rapidly, making it difficult to predict where the market is going before you swap your coin.
- Another challenge is that there are often fees associated with each trade, which can eat into profits.
- Another issue is that some exchanges require you to have a certain amount of money in your account before you can trade, which can make it difficult to get started if you don’t have a lot of money to invest.
- It takes knowledge and skill to set up trades quickly enough and correctly to take advantage of these opportunities.’
- Crypto arbitrage trading usually involves too many transactions. For instance, if you are implementing triangular arbitrage trading or Defi arbitrage trading, you will need to perform three or more transactions. These transactions, if not done carefully, could result in traders sending to the wrong wallet address.
Making money from crypto arbitrage trading is all about taking advantage of differences in prices between exchanges between different crypto pairs. By buying low on one exchange and selling high on another, you can make a profit.
However, this is not a risk-free endeavour; you need to be aware of the potential for loss as well as the fees associated with each trade. These fees, if not watched, can eat into your profit.