July 3, 2020 / Beginners

Cryptocurrency Arbitrage: How To Make Profit On Interexchange Trading

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Cryptocurrency arbitrage is one of the types of trading that has moved from the stock market to the cryptocurrency. Its second name is interexchange trading.

What Is Cryptocurrency Arbitrage?

Cryptocurrency arbitrage (interexchange arbitrage) is the process of crypto purchasing and sale, which leads to profit due to the spread between the cryptocurrencies rates on different trading platforms. In many cases, everything is decided in fractions of a second, or even milliseconds when trader make such transactions, so earnings depend on the speed of reaction and luck.

The concept of arbitrage came to the cryptocurrency market only a couple of years ago, while the stock market has been using this strategy for a long time. In general, arbitrage trading can be described as a strategy in which there is virtually no market risk. We can say that the trader is speculating on profitability.

And if the market risk during arbitration really tends to zero, then the technical risk is at a high level.

Failures in the operation of cryptocurrency exchanges, problems with the Internet, various errors, restrictions on input and output, and much more, lead at least to an unfinished transaction, or even to the loss of funds.

And since by now the human factor has, in fact, been completely excluded from arbitration, all the operations are done by bots. This is called High-Frequency Trading (HFT).

These are programs that work according to a special algorithm. They look for the difference in exchange rates of the same trading pairs at several sites at once and conduct transactions in automatic mode. But the final profit still depends on the onboard fees.

Where Does The Difference In Exchange Rates Come From With Interexchange Arbitrage

It is the difference between transactions that is the trader’s earnings in the interexchange arbitrage.

But what does the difference depend on? Let’s look at a few reasons:

Liquidity. The cost of cryptocurrency on exchanges is determined by supply and demand. If you take Bitcoin as an example, then the difference in exchange rates is usually several tens of dollars, but sometimes hundreds;

Transaction delays. Not all cryptocurrency exchanges are able to fully ensure the demand for a particular coin, which is why you have to resort to such methods. As a result, the price of a coin may rise, which creates favorable conditions for arbitrageurs. However, this, rather, concerns not the most popular websites;

The entrance of large players to a position or exit from it. It also happens that holders of serious amounts of cryptocurrency can throw off a large amount of a coin at a lower price. This immediately upsets the trade balance and creates chaos in the market.

When selecting the crypto exchange, users should study its policy, because at the moment some websites discriminate against users from this country. It is worth looking at the size of the fees and the ability to minimize them. For example, at Binance, you can pay fee in the Binance Coin (BNB) token. Thus, the size of the fee will be reduced by 25%.

Pros and Cons of OTC Arbitration

Pros:

  • Good yield. In this case, the main income is the speed of the software. The higher the speed of execution of transactions, the greater the income. At the same time, much depends on the speed of the exchanges themselves.
  • Low risks. Even if the transaction for one reason or another failed, the losses will be minimal.

Cons:

  • High entry threshold. Of course, you can start with $ 100, but then the maximum profit for a successful transaction will be a few US dollars. That’s why with the crypto arbitrage, the final earnings depend on the invested funds, the larger the deposit, the greater the profit.
  • Monitoring. Using a bot is a good and extremely useful business, but this does not mean that you do not need to follow it. And, despite the bot, nobody canceled the monitoring of exchange rates on exchanges. You can’t let the situation drift, because it’s about your means.
  • Fees. You need to choose a website based on fees. And it is precisely because of the fees that the second scheme, which we examined above, is most preferable.

In short, the main rule of crypto arbitrage comes down to a simple rule – latecomers pay money to those who come first. This strategy requires a lot of effort, hard work, and information gathering. And you cannot completely and completely rely on a bot because the algorithm for it was written by a person.

A trader is simply not able to simultaneously monitor the market situation and at the same time respond quickly to changes.

From all of the above, five rules of arbitrage trading can be noted, based on which a trader can minimize risks and make a profit:

  • Automation of the arbitration process using a robot/bot.
  • Work on reliable websites.
  • Trade with large volumes.
  • Using cryptocurrencies with high network capacity.
  • Entering and exiting at the right time.

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