Crypto arbitrage: what is it, how can you make money, and what problems do you need to avoid?

Crypto arbitrage: how can you profit from differences in crypto prices across different exchanges, and what potential problems do you need to look out for?

Crypto arbitrage                                 

As cryptocurrency becomes increasingly popular, people are looking for ways to make sure it turns a profit. One particular method that’s attracted both attention and controversy lately is cryptocurrency arbitrage. Some argue that this is a way of making money using crypto’s unique properties. Others claim it is a scam and can only end in financial ruin. Here, we take a look at crypto arbitrage to give you the information you need to make up your own mind.

Cryptocurrencies are traded on exchanges. Since there’s no single dominant exchange, they are, theoretically, independent of one another. This means that they are pretty volatile places and prices can show a level of disparity not seen on traditional exchanges. Because of this, you can buy low on one exchange and sell high on another, or at least higher, by using a system known as cryptocurrency arbitrage or crypto arbitrage for short. 

With something like 1,000 different cryptocurrency exchanges, there’s a head-swimmingly large number of permutations for cryptocurrency arbitrage. However, it is worth bearing in mind that the smaller exchanges increasingly take their cues from the larger ones, meaning price disparities can shorten fairly quickly. So, what looks like a good bit of crypto arbitrage one minute looks a lot less appealing the next, especially once you factor in fees, charges, taxes and so on. In fact, it is possible to lose money with crypto arbitrage trading if the various charges are more than the price difference.

Other problems can come about as a result of confusion. For instance, individual currencies could have similar, or even identical, symbols on different exchanges. Get them confused and you could end up losing money by accident. Someone involved in crypto arbitrage trading needs to check and double-check things are as they should be. For example, HellenicCoin and Huncoin are completely different coins but are both represented as $HNC on different exchanges. You need to be sure you don’t lose out simply by using the wrong wallets.

Crypto arbitrage can also fall foul of a lack of volume. Put simply, if there are not enough coins to go around, you will be unable to make the trade you want, leading to a potential financial loss. 

Nevertheless, crypto arbitrage has the potential to be profitable, at least for now. As long as you are careful and cautious, and stop once you’ve made enough profit, crypto arbitrage can be a good, if somewhat nerve-wracking way, to capitalise on crypto.

CRYPTO ARBITRAGE

Crypto arbitrage is where a buyer purchases cryptocurrency on one exchange and sells it, usually straight away, on another exchange for a higher price. For example, you could find Crypto X on Exchange Y for $100 and see it being sold on Exchange Z for $120. You can then buy the crypto from the first exchange, transfer it to the second exchange and sell it, making a profit of $20. Although various cryptocurrencies are usually worth roughly the same across exchanges, there’s often as much as a 20% disparity.

Because cryptocurrency is not backed by anything, its value is entirely dependent on what people pay for it. If we look at the example above, we can see that Crypto X on Exchange Y was most recently purchased for $100. This means that, as far as Exchange Y is concerned, Crypto X is worth $100. Meanwhile, the last purchase of Crypto X on Exchange Z was for $120, so Exchange Z thinks it’s worth $120. A crypto arbitrage buyer can take note of that disparity and use it to their advantage, thus making a profit.

Yes, usually. The practice of arbitrage is often encouraged because it contributes to market efficiency. The movement of items on an exchange should help balance the price across various exchanges. However, in some jurisdictions, there are caveats. If you are an American citizen using a foreign crypto account, then you need to make sure to report that account to the IRS. Otherwise, you could be in big trouble. As long as your paperwork is in order, you’ll probably be OK. As with all things, it’s best to check with a lawyer.

It can be. It’s a case of knowing when and where to take action. If you can transfer the money quickly, then there are profits to be made. Let’s look back at our example. We’ve got Crypto X on Exchange Y at $100 and on Exchange Z at $120. If you buy on Exchange Y and sell on Exchange Z quickly, you’ll make a profit. However, do you remember how we said that movements help balance the prices? Well, if the prices become balanced, there’s less opportunity to make a profit. If the price of Crypto X falls by $10 on Exchange Z, then you only stand to make a profit of $10. These fluctuations in price can happen very quickly, so you have to move fast if you want to lock in the highest potential profit.

The mechanism for doing this is pretty straightforward. You need to have money in your exchange wallet, and have properly set up accounts. You’ll also need to make sure you can transfer your money as soon as possible. 

This is easier said than done, but you will need to keep an eye out for significant differences in price between exchanges. This is to make sure you get the best profit, and take into account any reductions in the difference that may occur. You also need to be patient – don’t expect to find major differences every time you log in. And, of course, do your paperwork properly.

Crypto arbitrage is not risk-free. You need to make sure everything is in order: that you are working with the same pair of cryptocurrencies across exchanges and are fast enough to capitalise. Otherwise, you risk losing money.

You can use the usual method of crypto arbitrage detailed above, but there’s another way to arbitrage bitcoin. You can take your bitcoin and use it to buy another cryptocurrency that you think offers good value. This is called triangular arbitration and means that, since you’ve already got the bitcoin, you don’t need to worry.

Put simply, you need to follow the advice detailed above and hope for the best. Remember, nothing is ever risk-free.

The key components to success in crypto arbitrage are timing your trades well, making sure you’ve checked everything and, perhaps most importantly, luck.

FURTHER READING

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com Bel LLC or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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