Crypto Arbitrage: What Is It and How Do You Do It?

Crypto arbitrage is not a common term in the crypto community. But those who are focused on charts and fluctuations know all about arbitrage. As traditional financial institutions and other sectors of our economy begin to adapt for cryptocurrency, an ever-growing amount of platforms to trade, buy and sell on have become available. If we focus enough attention, we can use arbitrage to our benefit and increase profitability. 

While the popularity of digital currency increases, so do the costs. Instead of focusing on one platform, we can choose the most user-friendly versions of all the accessible platforms and then begin to use the monetary fluctuations among different websites to our advantage.  

What is Crypto Arbitrage?

Arbitrage has been around for ages in the stock and bond markets. With the popularity of crypto and the expanding ability for the masses to purchase on multiple user-friendly platforms, most just straight from our smartphones, the ability to take advantage of arbitrage is a no-brainer. 

Crypto arbitrage is when the bid price on one exchange is higher than the ask price on another exchange for a cryptocurrency. 

You might be asking yourself: “Why would I spend my time worrying about small incremental price fluctuations? Why would I want to focus on quick exchanges on a single platform?” 

This method may seem tedious and, in the beginning, somewhat mundane, using arbitrage to your advantage will lead to high profitability and more money in the account. For serious traders, every single fraction of a penny should be accounted for. 

Arbitrage also occurs when a trader takes advantage of one asset with less network or gas fees within one platform, purchases it, and trades it for the desired asset with more expense fees attached to it. With a quick search, finding which currencies are trading lower than the overall markets and showing which digital currencies have the lowest cost network or gas fees should take a couple of minutes. 

Working within one platform has its benefits. Typically network fees are not charged to trade amongst all currencies offered on the specific platform you are working in. 

Now that we’ve broken down arbitrage, let's talk about using it to your advantage.

Using Crypto Arbitrage to Your Advantage

For this explanation, I will use (arguably) the most well-known cryptocurrency: Bitcoin. 

When looking at Coinbase, the price of Bitcoin is, for our purposes, $39,965.00, and your purchase order includes a network fee of $25.99. 

On KuCoin, the price of Bitcoin is $39,464.00 with a network fee of $31.25 to purchase. Remember, we are looking at the same asset on two different platforms simultaneously. This happens for several reasons, most of which can be attributed to volatility and trading volume at that specific moment. 

Becoming efficient in this will prove to be worth the effort and start to add liquidity to your accounts that will increase profitability over time. Learning how to be patient when it comes to a digital currency trade is essential, but even more crucial is knowledge of market fluctuations and the fees associated with different price points. 

In the stock market, individuals that do not hold a stock for a long period of time are called day traders. Day traders exist in the crypto space as well. Day traders are hyper-focused on arbitrage to maximize their profitability. However, day traders are not the only traders using arbitrage to maximize profit. 

The Cons of Crypto Arbitrage and Why It’s Not For Everyone

Key Takeaways for Crypto Traders

• Research platforms that have the lowest fees 
• Be aware of the current market price on all platforms you’re trading on
• Keep track of all expenditures and the price points purchased along with all associated fees. We recommend using a spreadsheet so you can create formulas to showcase profit and loss
• When working within a single platform, determine which digital currencies have the lowest fees and lowest amount of volatility
• Swap or trade inside a single platform to maximize cost entry points 
• Over time the amounts saved from taking advantage of arbitrage should be used to possibly reinvest in the same or another asset to continue benefiting from the process

Conclusion

In summary, crypto arbitrage can work in your favor or add to red in your portfolio. When learning the ins and outs of the digital currency space, have patience and continue to educate yourself on the current market environment. 

Although the digital currency age began in 2009, we are just now finally starting to see widespread adoption and acceptance from established institutions. For those who have been in the crypto space since the start, it feels like it has been an eternity. However, we are at the very start of a new era, propelling forward from the front of the bell curve. 

Successful arbitrage is about eliminating fear and replacing that with knowledge. The more you learn about digital currency terminologies and the intricacies behind them, the less difficult it tends to be to navigate them to your benefit.

Sources:

What is crypto arbitrage and how does it work? | Decrypt.co

How much you'd have today if you invested 100 in Bitcoin in 2009 | CNBC