Cryptocurrency Arbitrage: What Is It and How Can We Do It?
Cryptocurrencies are not just a fad but a financial tool with tremendous potential. One method to capitalize on this market is cryptocurrency arbitrage. But what is it, and how can you use it to make money?
Due to the volatility of the currency and the increasing number of cryptocurrency exchanges available to users, this system has become very popular in the crypto world. It allows users to execute this process and realize profits almost immediately.
What Is Cryptocurrency Arbitrage?
Arbitrage, in simple terms, involves buying an asset in one market and selling it in another at a higher price. Regarding cryptocurrencies, this means buying a digital currency on one platform and selling it on another, taking advantage of price differences between exchanges.
Real example: Imagine that Bitcoin is valued at $10,000 on exchange A and $10,200 on exchange B. You could buy Bitcoin on A and sell it instantly on B, making a profit of $200.
Cryptocurrency arbitrage typically involves quick trades. Given price volatility, market opportunities can be missed if you let even a few minutes pass or don't secure a good return.
How Does Cryptocurrency Arbitrage Work?
As we've already mentioned, this process is possible because crypto exchanges do not always offer the same prices for a specific token. This price difference, often just a few dollars, is exploited to generate profit.
Why does the value of cryptocurrencies vary between exchanges? Cryptocurrencies derive their value from the law of supply and demand. Hence, exchanges with better liquidity tend to offer better prices, while those with less liquidity often have higher prices.
Types of Cryptocurrency Arbitrage
There are various forms of arbitrage in the crypto world. It's essential to understand this, as throughout the day, different strategies can be applied to maximize profits.
Here are the four most prominent or well-known types within the crypto community.
- Arbitrage of Exchanges
The most popular. Imagine you're exploring the best prices on a particular cryptocurrency. On TruBit, you find the cryptocurrency priced at $5,000, but on another exchange, it's listed for $6,000.
This disparity presents a classic opportunity for arbitrage. By purchasing the cryptocurrency from TruBit and then selling it on the other exchange, you stand to make a profit.
- Time Arbitrage
Perhaps you aren't a user of another exchange, but we can still engage in time arbitrage. Values can fluctuate even within the same exchange, allowing us to pursue various strategies for greater profit.
For instance, on the TruBit P2P Platform, you might find your favorite cryptocurrency priced at 5,000 USD. However, upon checking the TruBit OTC Market within the TruBit Pro Exchange, you discover you can sell it for 6,000 USD. This allows you to leverage different segments of an exchange to maximize profits.
- Triangular Cryptocurrency Arbitrage
What if we do arbitrage with 3 different cryptocurrencies? This is called triangular arbitrage. It is about taking advantage of price differences between 3 cryptos, using 2 or more exchanges. We explain it in a better way:
- You buy Ethereum on an exchange that has the lowest price.
- Then, you sell Ethereum and buy Litecoin on the exchange that gives you the most profit.
- Finally, you sell Litecoin for Bitcoin wherever the price is higher.
Keep in mind that this strategy is already more advanced, since you have to study prices and markets to avoid that the losses are greater than the expected profits. Consult a cryptocurrency academy to know the prices and behavior of cryptocurrencies.
- Statistical or Predictive Arbitrage
This form of crypto arbitrage is perhaps the most complex and is suited for true professionals. It employs various techniques and statistical analyses to identify buying and selling opportunities across different markets. To successfully employ this strategy, one must have a deep understanding of two or more exchanges. Through analysis, we can attempt to predict cryptocurrency prices. This involves considering factors like seasonality, the overall market situation, and in-depth analysis of each exchange.
When Is It Convenient to Perform Cryptocurrency Arbitrage?
Arbitrage is more convenient:
- When there are large price differences between exchanges.
- During volatility peaks.
- When you have tools and bots for quick trades.
Where Can I do Cryptocurrency Arbitrage?
To have a proper cryptocurrency arbitrage strategy, we need to have accounts in cryptocurrency exchanges. But, since it is our money, the ideal is to have 2 or 3 secure and regulated options that we know will work properly.
A great option to consider is TruBit, especially if you are in Latin America. The platform has a large portfolio of cryptocurrencies available for cryptocurrency arbitrage processes. In addition, you can buy crypto and fund your account with regulated payment methods.
TruBit can be one of your tools to do arbitrage, as there are some outstanding features like these 3:
- high liquidity: the stable liquidity of TruBit allows buying and selling cryptocurrencies quickly, with the best prices to have fluctuation options.
- Variety of cryptocurrencies: TruBit has the advantage of having a very large variety of cryptocurrencies, so it is also an option for the triangular strategy.
- Low transaction costs: there are different networks available in TruBit, so you can choose the right rate for trading and depositing. This is also excellent for increasing the compatibility between exchanges.
In TruBit you can also find different tools to do different types of crypto arbitrage, such as:
- P2P market
- OTC and cross-border payments
- Perpetual contracts
- Traditional trading tools such as Trading View
How Much Can I Earn with Cryptocurrency Arbitrage?
There is no fixed answer. As in the investment market and the cryptocurrency market in general, there are several factors that can determine the amount of money you can earn, such as the following:
- Price differences between exchanges.
- Transaction speed.
- Transaction costs and fees.
It is essential to research and be informed in order to maximize your profits. Also, as we always recommend, never invest or gamble money that you are not willing to lose, as volatility can work against you on many occasions.
Conclusions on Crypto Arbitrage
Cryptocurrency arbitrage is a financial technique that, if used correctly, can be lucrative. By buying low and selling high between different exchanges, you can take advantage of price differences to generate profits. However, it's crucial to stay informed, understand the risks, and utilize the appropriate tools.
FAQs about Cryptocurrency Arbitrage
Is cryptocurrency arbitrage legal?
Yes. It is an evolution of buying and selling cryptocurrencies, so there is no problem as long as the funds are purchased legitimately.
What are the risks of cryptocurrency arbitrage?
It should be mentioned that cryptocurrency arbitrage has an investment risk, since it is speculative.
But in addition to the natural risk of an activity like this, there is always the possibility of fraud, because some insecure platforms make a Ponzi scheme for better profits. There are also bots that use false data to prevent users from earning money.
For that reason, always choose cryptocurrency exchanges that are safe, efficient, and fully regulated. TruBit has international bodies and uses advanced security measures to protect its users and their funds.
So we recommend you to pass all your verifications (such as KYC) to keep your account as safe as possible.
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