24 November 2020
Cryptocurrency exchange has exploded in the past few years. Jumping on the bandwagon now may mean you get to rake in the big bucks, too.
Crypto arbitrage involves making money by buying and selling crypto at different prices, which is possible because of price imbalances. Imagine if you found out that one exchange lists a cryptocurrency at $1,500, while another values it at $2,000. Buying the crypto worth $1,500 and selling it at the second exchange means you earn $500 in a matter of minutes.
There are two most common types of arbitrage, which are regular arbitrage and triangular arbitrage. Let’s take a closer look at each one.
With regular arbitrage, you buy cryptocurrency from one exchange then sell it on another. For example, if Binance values a crypto at $300 and Coinbase values it at $500, you can buy from Binance, transfer your assets, then sell on Coinbase.
And in a few quick minutes, you’ve made $200.
This price imbalance happens for several reasons. If the trading volume on one exchange is higher than on another, the prices can be lower. The supply of cryptocurrencies also determines the difference in prices.
How to Earn Profit Using Regular Arbitrage: Step by Step
1. List yourself on different exchanges
2. Monitor the sites regularly
3. As soon as you spot a difference, buy cryptocurrency from the cheaper exchange
4.Transfer your cryptocurrency to the second exchange
5. Sell your cryptocurrency and retrieve your fiat money
What are some potential drawbacks of regular arbitrage? T
First of all, the process of transferring your currency across different exchanges can take a while. The price imbalances may only last for a few seconds. If you are looking to engage in this form of arbitrage, it will benefit you to hold currencies in different exchanges.
Triangular arbitrage involves trading in one exchange, but across three different currencies.
For example, you can choose to trade between Bitcoin, Ethereum, and Ripple. You use fiat money to buy Bitcoin, then sell that Bitcoin and buy Ethereum, and then sell Ethereum to buy Ripple.
The idea is that there are slight price differences between the currencies if you convert them to fiat money. Some currencies may be undervalued compared to others. By trading between the currencies before withdrawing your money, you make use of the price imbalances to gain a profit.
How to Earn Profit Using Triangular Arbitrage: Step by Step
1. Deposit money in an exchange
2. Buy the first cryptocurrency
3. Exchange this for a second cryptocurrency
4. Sell the second cryptocurrency to buy a third one
5. Sell the third cryptocurrency for fiat money
6. Withdraw your profits
What are some drawbacks of triangular arbitrage? While you can undergo this process within one exchange and will not have to worry about moving your money across different platforms, the possibility of profit-making is less here.
This is because the differences between cryptocurrencies in one exchange are not likely to be that large.
Advantages of Crypto Arbitrage
There’s a reason why crypto arbitrage is growing more popular, and why it may even be more profitable than trading on traditional markets. These are some of the advantages of crypto arbitrage.
1. Quick and Low-Risk
Crypto arbitrage is often considered a way to make profits without risking anything. All you do is exchange your crypto across different platforms or currencies, which happens in a few seconds or minutes. While the window for profit may be small, missing it will not make you lose your money.
2. Lots of Opportunities
You can conduct arbitrage across different crypto exchanges, and there is a whole array of cryptocurrencies to choose from. This gives you almost endless opportunities to take advantage of price differences.
Sometimes, the sheer volume may prevent you from focusing on the currencies that matter the most. Take the time to study the entire market before focusing on several currencies or exchanges that often experience price differences. That way, you can immediately track a price imbalance and trade your crypto.
3. The Crypto Market Is Volatile
This is both a pro and a con. But in the case of crypto arbitrage, you can stand to win more than lose with this quality.
With prices changing so often, there are bound to be disparities across different exchanges or currencies. Some of those differences will be huge. The challenge is to be able to trade and make use of that imbalance because it will be gone in an instant.
Disadvantages of Crypto Arbitrage
As with any trading activity, crypto arbitrage does carry risks and disadvantages. These are some of the most common drawbacks involved with crypto arbitrage.
1. You May Need to Trade a Lot
In reality, most of the price imbalances will be relatively small. You may not always receive hundreds of dollars in one go, so you will have to monitor the market constantly in order to truly benefit.
2. Pump and Dump Schemes
“Pump and dump” happens when groups of people deliberately inflate the price of a cryptocurrency (often a small or unknown one) by buying and selling large quantities of the currency.
This will draw a lot of market attention and incentivize other traders to buy as well, and the price keeps increasing. Once it reaches a peak, however, the scammers withdraw and the price plummets.
This is a drawback of trading in general, but it’s something you still have to be aware of when undergoing crypto arbitrage. To prevent getting duped into a pump and dump scheme, you can learn more about technical analysis and follow authentic trade signals.
Making Money With Crypto Arbitrage
Overall, crypto arbitrage is likely more beneficial than it is risky. As long as you take the time to analyze the market and make sure you are choosing your trades well, you can earn big from trading this way.
We hope you found this article on crypto arbitrage helpful. Here at Dchained, we strive to educate and make people feel comfortable with cryptocurrency investment. This is only a small bit of all the information we have to offer. If you’re looking to get started with cryptocurrency investing, be sure to check out our Ultimate Beginner’s Crypto Course