Cryptocurrency Arbitrage: A Strategy for Earning on Volatility

Today, there are a huge number of ways to earn money on crypto. Each of them differs in profitability, investment limit and other factors. One of the ways to earn money is cryptocurrency arbitrage. Most likely, many of you have heard of it. Cryptocurrency arbitrage is buying crypto in one trading pair and selling it in another. As a result of such transactions, the user makes a profit on the difference in exchange rates. Cryptocurrency arbitrage differs from trading in that the transaction is made immediately, and you do not need to wait for changes in the exchange rate. Let's take a closer look at how it works in simple words and what types of arbitrage there are.

How does cryptocurrency arbitrage work?

Crypto arbitrage involves quick and accurate transactions. You need to buy crypto at a low price and sell it at a higher price. Let's look at the step-by-step process of making a transaction:

1. Market monitoring. You research different exchanges to start with and see what prices they offer for crypto. The cost can vary due to trading volume, different liquidity levels, and so on. Using a monitoring platform, you find different arbitrage bundles.
2. Identifying your opportunities. As soon as you discover a difference in crypto prices large enough to make a profit, you're ready to make a trade. Take into account transaction fees and time to transfer funds between exchanges.
3. Buying crypto. You choose an exchange that trades crypto at the lowest possible price, buy it taking into account the liquidity of the market.
4. Funds transfer. You choose an exchange where the same crypto is more expensive and transfer it. Here it is very important to take into account the time you spend on the transaction. After all, in a matter of minutes, the value of crypto can change, and you will lose your funds.
5. Selling crypto. After you transfer cryptocurrency, you need to sell it at a higher price. The proceeds can either be withdrawn or kept for new transactions.

In this scheme, the first stage is very important. After all, you need to carefully monitor the market and find exchanges with the lowest and highest prices for crypto.

Types of cryptocurrency arbitrage

The following types of cryptocurrency arbitrage are distinguished:

1. Inter-exchange arbitrage.
2. Intra-exchange arbitrage.

The essence of inter-exchange arbitrage is that crypto is bought on one exchange and sold on another, taking into account the difference in price. The sale is always carried out at a higher rate. Among the features of this method:

1. You will need to pay not only a transaction fee, but also a withdrawal fee. And this is an unnecessary investment.
2. Tracking opportunities between exchanges is much easier than for trades within a single exchange.
3. If the difference is small, the crypto exchange will be unprofitable.

This method gives you the opportunity to return the funds to the first exchange and make another round if necessary. Here it is very important to conduct transactions carefully and closely monitor the rates so that you have the opportunity to earn. Take into account the timing of withdrawal of crypto from one exchange and the speed of transferring it to another.

In the case of intra-exchange arbitrage, all transactions take place within the same exchange, but in different trading pairs. You can exchange ether for bitcoin or bitcoin for dollars and then dollars for ether. Among the features of this type are:

1. You will only have to pay a commission for transactions within the exchange.
2. You will need experience in order to actually make money from such operations.
3. You will have no need to waste time transferring funds to another exchange.

Keep in mind that any arbitrage methods require at least a little bit of experience from users.

How do you start arbitration?

To start working with crypto arbitrage, first of all, you need to decide on its type and form a strategy taking into account the peculiarities and limitations of specific platforms. The basic algorithm is very similar in all cases:

1. Select several exchanges at once after monitoring the market and create accounts on them. Verify and fulfil all the requirements of each exchange to get access to the functionality.
2. Make a deposit to each of the accounts. If you already know the direction of the trade, adjust the capital allocation.
3. Analyse the intricacies of the exchanges, find the currency differences for different pairs on the exchanges.
4. Once you find an exchange with a lower price, place a buy order, then transfer the crypto to another exchange and sell it at a higher price.

Using your knowledge, you can make good money on cryptocurrency arbitrage. But don't forget that you will have to consider all the risks and expenses you will have to spend on commissions and withdrawals.

Advantages of arbitration

Earning money from cryptocurrency arbitrage has a huge number of advantages. And the key one is minimising risk, as you won't be dependent on the directional movement of the market. Instead, you need to focus on the difference in price to make your profit in a fairly short period of time. Making transactions quickly with bots will give you the ability to react effectively to changing market conditions, which will significantly increase your chances of success and earn more money. Thus, you will have a stable income and there will be no risks that are present in other ways of trading crypto.

Disadvantages of arbitration

You need to consider that crypto arbitrage has not only advantages, but also disadvantages that can make it difficult to make profits. First of all, note that you will have to pay a transaction fee, and the limited liquidity can reduce the amount of your profit. In addition, the prices of crypto on the market can change very sharply, and the time spent on each transaction is sometimes impossible to control. And if you do not manage to sell the purchased crypto in time, and it increases in value, you risk losing your funds. 

Open your own crypto exchange

If you are interested in making money from P2P transactions and you want to make regular profits, then you need to open your own crypto exchange. BoxExchanger company will help you with this. Our specialists provide a wide range of services, and they are ready to accompany you at all stages of launching and running an exchanger.