How to Arbitrage Cryptocurrency: Choosing an Exchange and Cryptocurrencies
Exchange arbitrage of cryptocurrencies is an option for earning money. It consists of buying a digital currency at a low price on one exchange and then selling it at a higher price.
Arbitrage on cryptocurrency exchanges seems like a simple way of making money. But it’s not that simple in reality.
What Is Cryptocurrency Arbitrage
Cross-exchange cryptocurrency arbitrage is a comparison of the value of cryptocurrency assets on exchanges. If a trader has a lot of capital for investment, then the income will be higher. At least that’s the case in theory. Well, what is really happening? Let’s start by looking at the types of arbitrage.
There are two main types of cryptocurrency arbitrage:
Let’s consider them in more detail.
Intra-exchange Cryptocurrency Arbitrage
Intra-exchange arbitrage compares the rates of various crypto coins within an exchange to exchange cheap cryptocurrencies for expensive ones and make a profit.
The main advantage of intra-exchange arbitrage is that the trader’s commission costs are lower. The investor does not have to transfer money between trading floors.
Another circumstance faced by traders trading on inter-exchange arbitrage is the long deposit and withdrawal of money. It can take several hours or even days to get money on the exchange or transfer it to fiat. During this time, the cryptocurrency rate can change dramatically. The investor will incur losses.
When trading within one exchange platform, do not forget about internal monitoring. The exchange employees are trying to find the inconsistency of rates and seek to level them out faster.
Arbitration Between Cryptocurrency Exchanges
Inter-exchange arbitrage consists of monitoring prices on various trading platforms to buy crypto at a low price and sell it at a higher price.
The main advantage of inter-exchange arbitration is that it is easier to find the discrepancy between rates on different trading floors than within one.
You can find the most profitable rates for buying and selling crypto on your own, but it is quite difficult. It is possible to simplify earnings on cryptocurrency arbitrage using paid cryptocurrency signals or automatic cryptocurrency arbitrage online – using trade advisors or special sites.
A trading advisor is an aggregator that combines many technical analysis indicators and can compare rates on different trading platforms.
Immediately, we note that there is no such thing as the best bot for cryptocurrencies. There are trading advisors that differ in their functionality. Which one to choose depends on the goals and objectives of the trader.
One of the difficulties in inter-exchange arbitration, which we have already briefly mentioned, is the fees for the deposit/withdrawal of cryptocurrency and the duration of this process. These factors can significantly reduce profitability or even lead to losses.
Cryptocurrency Arbitrage Schemes
There are three most common schemes for making money on arbitrage:
- “Inter-exchange spread”. A trader finds a site where the crypt is cheaper, buys a coin, then sells it on another site for a higher price, leaving the difference to himself. The main disadvantages of the strategy are commissions that can level out profits and the duration of the process of depositing and withdrawing funds.
- “Trading on the exchange deposit”. The scheme implies the constant availability of money on the accounts of different exchanges. It avoids the risks associated with the transfer of money between sites. Its main drawback is that it is not safe to keep money on exchanges. And not all traders have enough funds to open deposits on several platforms at once.
- “Intra-exchange triangle”. This scheme allows you to make money on the difference in quotes within the exchange, avoiding the risks of transferring funds between platforms. The main drawback is that the exchange conducts internal monitoring of quotes.
Selection of an Exchange and Cryptocurrencies
The choice of exchanges for crypto arbitrage is an important stage in the preparation of the user. Your income will depend on how quickly you can exchange cryptocurrency on exchanges. Suppose the withdrawal from the crypto exchange takes a long time. In that case, the cryptocurrency rate can greatly change, and you will lose income or even incur losses. Therefore, you need to choose only trusted crypto exchanges with high liquidity.
Exchange Selection Criteria
To make arbitrage possible without any special risks and in the most comfortable way, you need to choose the right exchange. It must meet the main criteria:
- Low commissions for trading, deposits, and withdrawals.
- Fast deposit/withdrawal speed.
- No problems with deposits.
- The high density of order books and large order volumes.
How to Choose a Currency
To choose a suitable asset for crypto-arbitrage, use a service for arbitrage, rate monitoring, or a special scanner that directly tracks cryptocurrency rates on different crypto exchanges.
Cryptocurrency Arbitrage Tools
To make arbitration of cryptocurrency rates more effective, traders use arbitrage auxiliary programs, which allows to partially automate monitoring:
Scanners. The arbitration scanner monitors cryptocurrency rates on several exchanges and identifies pairs in which cryptocurrency prices differ the most. Some scanners provide access to trading and withdrawal via API to simplify and speed up the process for traders.
Cryptocurrency arbitrage bots. An arbitrage bot can detect the difference between rates on different crypto exchanges and conduct operations on its own without the participation of a trader. Robots respond faster than humans and can monitor the crypto market around the clock, increasing potential income.
Comparison tools. It is the easiest way to track crypto-asset rates that any beginner can handle. Still, it will be more time-consuming as the software can detect matching pairs in milliseconds.
How to Make Money on Cryptocurrency Arbitrage
Successful resale of a crypt requires an investor to have business qualities. Such, for example, as an analytical mindset, the ability to respond quickly to a market situation. Certain skills and knowledge are required to understand which coins arbitrage can earn.
The advantage of crypto-arbitrage over other methods of making money on crypto-currencies lies in simplicity and lower risks for beginners. Many novice investors ask themselves where to get the necessary skills and knowledge to confidently conclude transactions on crypto exchanges? You can learn on your own or take training in special education courses.