Adrian JulianThere is a practice which aims to profit not from the rise or fall of an asset, but from differences in price or value of it on several markets or exchange platforms. Yes, basically, this is the profit when you buy/resell crypto.
If you buy, for example, 1 bitcoin at a price x and you resell it on another platform at a higher price, you are doing arbitrage. Thus, we can also do arbitrage with trading bots like Bitsgap for those who prefer automated trading.
(You can read to know more: Our opinion on 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?
Maybe you didn't know it but know that it is the simplest and most accessible method in the crypto trading in general.
In finance, the term arbitrage is used to refer to a transaction by which a person purchases an asset, a security or other financial product on a market and sells it on another market where the asset is tradable. The trader thus exploits the price differences between the two markets to make a profit. Obviously, the possibility of making a profit depends very much on the transaction costs of moving the asset or financial instrument.
Therefore, arbitrage only generates a profit when transaction revenue exceeds the costs of moving the instrument from one market to another. Compared to outright speculation, arbitrage differs in the profit method. In speculation, profit comes from the fact that the price of the purchased asset increases in the same market. In the case of arbitration on the other hand, profit is generated by price differences of the same asset in different markets.
Cryptocurrency arbitrage: how does it work?
As interest in cryptocurrencies and their investment opportunities has grown exponentially, there has been a proliferation of institutions and portals allowing the purchase and sale of cryptocurrencies. This multiplication of platforms has made it possible to implement 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, a 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 the arbitrage strategy on cryptocurrencies is played out. In practice, after having carefully studied the different markets, the trader chooses one or more coins, identifies the market that offers the lowest purchase price, buys the crypto in question. Afterwards, it identifies the market that offers the highest selling price and sells the cryptocurrency he bought at a low price.
How to arbitrate?
Arbitrage is simple. Simply register on different exchange platforms and analyze the price difference. However, you can also do this by automatic trading. This is indeed much simpler. It takes a lot of time and energy to do it manually. There is way too much data to process.
So, using a trading bot, everything is simplified. You just do it without even knowing how to code or even trade. You can use the Bistgap bot which specializes in arbitration. This will allow you to arbitrage simply.
Of course, there are other bots and you can read our comparison here on the best crypto trading bots.
Types of cryptocurrency arbitrage
There are several arbitration practices, from the simplest to the most complex. They are not all equally effective. The ultimate goal is to make the most profit possible. Of course, this involves the use of advanced tools, as it is often unthinkable to apply arbitrage manually. Even with bots, the competition is very strong, and the software must therefore be very fast and efficient.
🎯 Simple arbitration
This is the simplest and most common practice, I will explain its principle to you. You follow the instruments on the stock exchanges and observe the price differences on the same instrument between the different platforms. If the difference, net of trading, transfer and withdrawal fees, remains sufficient to justify the movement, the crypto asset is identified as potentially profitable.
🎯 Understanding triangular arbitrage
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 many benefits to traders. Some decide to improve their daily investments by automating their operations. This is also possible in the digital currency market, because you can start considering automated arbitrage. To do this, you will need to use special bots for automatic trading. They are designed to take advantage of price differences between digital currencies.
This is software that works based on algorithms, which you can configure as you wish to decide how they work. They access and carry out the negotiation automatically. However, the first impulses on which the final course of the investments made will depend are always linked to pre-established decisions by the trader. Therefore, if you are interested in the benefits of automatic arbitration, 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 wrote an article on 5 Best Crypto Trading Bot:
Cryptocurrency arbitrage: Is it legal?
You may be wondering if cryptocurrency arbitrage is a legal practice. I'll give you a straight answer: yes, arbitration is completely 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 practices with which online traders can enter the cryptocurrency market. It can play an important role in increasing the profits you can earn. This is particularly the case if you plan to do it through automated trading bots. Despite the sand, the 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. This is general information. Do your personal research before investing. Always.
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