There's a practice that aims to profit not from the rise or fall of an asset, but from the differences in its price or value across multiple markets or exchanges. Yes, basically, that's the profit you make when you buy and sell cryptocurrencies.
If you buy, for example, 1 bitcoin at a price x and sell it on another platform at a higher price, you are engaging in arbitrage. Arbitrage can also be performed using trading bots like Bitsgap for those who prefer automated trading.
(You can read more: Our review of Bitsgap ).
This method called arbitrage is very common among traders. In more emerging markets like cryptocurrency, arbitrage is generally more profitable, or simply more feasible, thanks to less regulation. I will tell you more about this practice and also show you how traders get the most out of it.
Arbitration: what is it in concrete terms?
Perhaps you didn't know this, but it's the simplest and most accessible method in crypto trading in general.
In finance, the term arbitrage refers to a transaction in which a person buys an asset , security, or other financial product in one market and sells it in another market where the asset is traded . The trader thus exploits the price differences between the two markets to make a profit. Naturally, the possibility of making a profit depends heavily on the transaction costs associated with moving the asset or financial instrument.
Therefore, arbitrage only generates a profit when the transaction proceeds exceed the costs of moving the instrument from one market to another . Compared to pure speculation, arbitrage differs in its profit-making method. In speculation, profit arises from the price of the purchased asset increasing in the same market. In arbitrage, however, profit is generated by price differences for the same asset in different markets.
Cryptocurrency arbitrage: how does it work?
With interest in cryptocurrencies and their investment opportunities growing exponentially, there has been a proliferation of institutions and portals facilitating the buying and selling of cryptocurrencies . This multiplication of platforms has enabled the implementation of arbitrage techniques on this new investment instrument.
Different exchanges can be considered different markets where the same asset is traded. Obviously, not all platforms support all cryptocurrencies in circulation. But generally, the same digital currency can be traded on multiple exchanges . Thus, the price of the same asset can vary from one platform to another.
It is precisely on these price differences that cryptocurrency arbitrage strategies rely. In practice, after thoroughly studying the various markets, the trader chooses one or more coins , identifies the market offering the lowest purchase price, and buys the cryptocurrency in question. Then, they identify the market offering the highest selling price and sell the cryptocurrency they bought at a low price.
How to arbitrate?
Arbitrage is simple. You just need to register on different trading platforms and analyze price differences. However, you can also do it through automated trading . This is indeed much simpler. Doing it manually requires a lot of time and energy. There's far too much data to process.
Therefore, using a trading bot simplifies everything. You can do it without even knowing how to code or trade. You can use the Bistgap bot , which specializes in arbitrage. This will allow you to easily perform arbitrage.
Of course, there are other bots and you can read our comparison here of the best crypto trading bots.
Types of cryptocurrency arbitrage
There are several arbitrage practices, ranging from the simplest to the most complex. They are not all equally effective. The ultimate goal is to maximize profit . Of course, this involves using advanced tools, as manually applying arbitrage is often impractical. Even with bots, the competition is fierce, so the software must be extremely fast and efficient.
? Simple arbitration
This is the simplest and most common practice; let me explain the principle. You track the instruments on the exchanges and observe the price differences for the same instrument across different platforms. If the difference, net of trading, transfer, and withdrawal fees, remains sufficient to justify the move, the cryptocurrency is identified as potentially profitable.
? Understanding triangular arbitration
This practice fixes trading on a single exchange. How is arbitration possible in this way, you ask? It's simple: I consider 3 pairs of coins BTC/XRP, XRP/ETH and BTC/ETH. With a quick calculation, I can immediately check if three such operations allow me to end up with a larger amount of BTC. It is necessary to take into account certain criteria:
- Trading fees which are more important since 3 operations are necessary;
- The order book which must be sufficiently populated to guarantee the satisfaction of the three orders;
- Operation speed : competition is very strong on triangular arbitrage, so latency must be minimal. Remember that if an intermediate transaction fails, you may suffer considerable losses.
? Understanding automatic arbitration
The evolution of online trading has brought numerous advantages to traders. Some choose to improve their daily investments by automating their operations. This is also possible in the cryptocurrency market, as you can start considering automated arbitrage . To do this, you will need to use special bots for automated trading. These bots are designed to profit from price differences between cryptocurrencies.
These are software programs that operate using algorithms , which you can customize to your liking to control their behavior. They access and execute trades automatically. However, the initial impulses that determine the final price of the investments are always linked to the trader's pre-established decisions . Therefore, if you are interested in the advantages of automated arbitrage, you should:
- Use safe and reliable automatic crypto trading systems : unfortunately, even in these situations, scams are not foreign to the sector;
- Establish the right settings for the software to work : Although it works automatically, you decide which strategies it should execute.
We've written an article on the 5 best crypto trading bots:
Cryptocurrency arbitrage: Is it legal?
You're probably wondering if cryptocurrency arbitrage is a legal practice. I'll give you a direct answer: yes, arbitrage is perfectly legal.
This is why more and more traders are interested in this practice. What I advise you to consider carefully is how to avoid scams that result in irreparable economic damage. This requires a platform that has all the cards in hand to protect the interests of its users.
Conclusion on arbitrage to make money trading
Cryptocurrency arbitrage is one of the most fascinating ways online traders can enter the cryptocurrency market . It can play a significant role in increasing your profits, especially if you plan to use automated trading bots. However, risks are always present . Before concluding, I remind you that you should only use secure exchanges.
Articles to go further:
- Discover our opinions on Bitsgap, one of the easiest trading bots to use
- The best trading bot
- La difference between 3commas and Cryptohopper
Disclaimer: This is not investment advice. It is general information. Do your own research before investing. Always.
To buy cryptocurrencies (in a simple way) :
To generate interest on your cryptocurrencies:
To secure your cryptocurrencies:
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