TLDR
Crypto trading can be very stressful and full of uncertainty. Investors and traders rely on market conditions and predicting trends. However, this approach enables you to be active in the market and profit from price discrepancies regardless of market conditions.
Arbitrage trading can be done manually or with trading bots. You can arbitrage trade on one exchange or cross-exchange, in addition to trading one crypto asset or many correlated ones.
This guide will cover all you need to know to start arbitrage trading in 2024 and beyond.
Introduction
There are numerous ways and trading strategies to make money in the cryptocurrency market. Buying and holding for the long run, day trading, or participating in ICOs. However, all approaches have in common that they are chosen by your level of knowledge, risk aversion, and the amount of capital. But without risk, we can’t see a reward. In other words, if the risk is low, the reward is low; if the risk is high, the reward is high.
Arbitrage trading appeals to those seeking certainty and are content with low returns in exchange for minimal risk. Typically, this trading method involves large capital pooled by investors and overseen by a fund manager. So those high rewards can stack up very quickly, especially due to its high-frequency trading done with algorithmic trading.
In 2021, an interview featured Sam Bankman-Fried, revealing how he amassed a significant fortune through active arbitrage trading. His strategy involved transferring funds between multiple exchanges, capitalizing on lower prices in Western exchanges, and selling at higher prices on Asian exchanges. This approach allowed him to exploit price discrepancies and generate profits.
This approach is called cross-exchange arbitrage trading and is one of the various strategies. So, in this guide, we will discuss how arbitrage trading can be done and whether it is still viable in 2024 for retail traders.
What Is Arbitrage Trading Crypto?
Arbitrage trading is buying and selling the same asset across different exchanges and capitalizing on price discrepancies. Crypto arbitrage trading is buying and selling a particular cryptocurrency on different exchanges where the price differs. This strategy allows traders to make a small but certain profit from the price discrepancies.
Arbitrage traders can do this manually, but they often use trading arbitrage bots as they can perform this action much more quickly. In the following paragraphs, we will discuss when this opportunity can be capitalized on and the main trading strategy.
Why Do Cryptocurrency Trading Arbitrage Opportunities Arise?
As discussed above, crypto arbitrage enables traders to see price differences between exchanges in different countries. There are possible arbitrage trades in cryptocurrency if different rates exist for certain digital assets. This is especially true when a coin is first launched, and the price is yet to be discovered by the market demand.
A cryptocurrency’s real-time price will determine the price of bid-ask orders matching orders on the exchange. The bid-and-receipt price differs from one exchange mainly because of the differences among investor requests. This exchange relies upon centralized orders. The automation of trading is different from decentralized exchanges and crypto trading. Instead of centralized order books, exchangers use liquidity pools. All pairs are backed by liquidity.
Types of Crypto Arbitrage Strategies
Cryptocurrency arbitrage traders can exploit the market’s inefficiencies in many different ways. We will cover the most popular ones: cross-exchange arbitrage, spatial arbitrage trading, statistical arbitrage, and triangular arbitrage trading.
Cross-Exchange Trade (Simple Arbitrage)
Cross-exchange trades, also known as simple arbitrages, involve purchasing a cryptocurrency from one exchange, transferring it to another, and selling it at a lower price. However, a challenge arises as the transfer of information within an exchange can take at least ten seconds. During this timeframe, arbitrage opportunities can vanish, and slippage can cause cryptocurrency prices to surge before trades can be executed.
For example, when examining the current 5-minute Bitcoin chart, we observe that the price on Bitfinex is $27,785, while on Bitstamp, it is $27,798. Theoretically, you can buy Bitcoin on Bitfinex and sell it on Bitstamp to earn $13.
However, when you transfer the coin and pay the fee, this might not be viable. To execute this strategy successfully, you must find a bigger price discrepancy at a lower transfer cost than the actual trading volume and fees.
Holding The Same Asset On Different Exchanges
To solve the problem presented above – the cost and speed of transferring the coins between crypto exchanges you can hold the same asset and arbitrage trade it internally without transferring it.
In this case, an arbitrage trader would act quickly, purchasing the asset on one crypto exchange and selling it on another.
The disadvantage of this arbitrage trading strategy is that you would have a lot of capital sitting on both crypto exchanges and wait for the opportunity to present itself. But the upside is that you eliminate trading fees.
Triangular Arbitrage
Triangular arbitrage trading is more complex than the previous arbitrage trading strategies. It involves trading correlated multiple trading pairs, for example, BTC/USD, BTC/EUR, and EUR/USD. Or strictly keeping it in crypto trading pairs like ETH/BTC, BNB/BTC, and ETH/BNB.
Crypto arbitrage traders can find it particularly advantageous to exploit price disparities on spot markets for altcoins. Altcoins are often purchased using BTC or ETH, and their USD value is derived from the USD value of BTC or ETH at the time. Given the price fluctuations of BTC and ETH and the potential oversight of USD valuation, this presents an excellent opportunity for crypto arbitrage.
What Are Crypto Arbitrage Trading Bots?
Crypto arbitrage trading bots are computer programs that allow users to buy crypto using a specified algorithm. Trading bots link their user cryptocurrency exchange account to an API that automatically trades on price changes.
Although people use trading bots in various trading settings, these are especially used by crypto arbitrage traders. Since arbitrage requires traders to move quickly between different systems, the automated trading system can give traders the speed necessary for success. These computer applications only work when they have algorithms used by the trader.
There are many kinds of arbitrage trading bots, but most depend on the arbitrage trader to set the parameters to execute the trades. Some trading bots can run on automated trading, but those are generally not as good. It is always better to have a general knowledge of the trading strategy you want to use and program the bot accordingly.
Worth noting is that these bots don’t guarantee profitability. Like in trading, there is always a drawdown and room for mistakes. These bots primarily offer a speed of execution that is unrivaled by manual execution. Also, they can account for more information than crypto arbitrage traders can and potentially make better decisions at one given moment.
Top 3 Crypto Arbitrage Trading Bots
1. Cryptohopper
Cryptohopper is one of the best crypto arbitrage bots. It’s a good platform to trade multiple crypto assets on the same exchange. It offers spot and futures trading bots and various technical analysis tools. Also, it is a good tool for managing your portfolio and staying on top of your crypto holdings.
The platform offers a copy trading feature, enabling users to replicate the actions of other users, discuss potential trades, create futures bots, and apply different bot presets. All of these functionalities are accessible without the need for technical or coding knowledge.
More details
Cryptohopper is a great trading bots for their market trades. Due to cryptocurrency trading bots' sophisticated trading functionality and user-friendliness, Cryptohopper is the ultimate bot for new and advanced users. These competing trading bots can be outfitted with data-driven insights and individualized trading techniques to improve their performance.
-
Allows individuals to automate their transactions.
-
Create customized trading strategies.
-
Supports integration with multiple exchanges.
-
Advanced charting and technical analysis tools.
-
All functions acessable via mobile apps.
-
The platform can be difficult for beginners to navigate.
-
Monthly subscription for advanced features.
-
Challenging for non-technical users.
How Do Cryptohopper Arbitrage Trades Work?
The crypto trading bot runs on automated trading strategies, an algorithm that searches for arbitrage trading opportunities across exchanges. It lets you find and capitalize on those opportunities without withdrawing money from those exchanges.
This means it’s an all-in-one platform trading robot that allows arbitrage traders to eliminate fees.
You must connect your API keys from the different exchanges to the platform and create a strategy. Then, you must select the Exchange Arbitrage feature and are all set.
2. Bitsgap
Bitsgap, one of the leading crypto arbitrage bots, stands out for its beginner-friendly approach and implementation of highly effective trading strategies. It also supports trading through an API by connecting exchange accounts to the trading bot.
It doesn’t have access to the withdrawal, so to do the rebalancing, you must manually send crypto across exchanges. Arbitrage traders can select the desired trading pair or just a single crypto, and the bot will automatically search for the best arbitrage trades.
Arbitrage bots typically require a deposit on the exchanges to facilitate a successful strategy, making this platform ideal for cross-exchange arbitrage. For instance, an arbitrage bot can execute a programmed action of placing a limit order to buy on Binance and simultaneously placing a sell order on Bitfinex, enabling it to capitalize on price differences identified by the trading bots.
More details
Bitsgap is a trading bot that offers a comprehensive platform for users to trade digital assets on multiple exchanges from a single account. The bot automates trading strategies, provides real-time market analysis, and helps users make informed decisions by offering advanced technical indicators, charting tools, and other features.
-
Fully automated bots that work 24/7.
-
Backtested ready-to-go strategies.
-
No withdrawal fee.
-
User-friendly interface for easy navigation.
-
7-day free trial and a demo trading mode.
-
The monthly subscription fee for using the platform.
-
No mobile app to access Bitsgap through smartphones.
How Do Bitsgap Arbitrage Trades Work?
First, you need to sign up and log into the platform. The next step is connecting your API keys from different exchanges. After three days of backtesting, the Bitcoin arbitrage bot found and outlined some good trades.
You can also test the bot in the demo mode and ensure the strategy is profitable. Also, you can perform your backtesting for more advanced traders.
3. Trality
Trality provides two options when it comes to automated trading bots. You can either rent one or create your own. It is a fully automated solution for managing crypto arbitrage and custom trading strategies. It utilizes the new Artificial Intelligence (AI) advancements to offer a full range of market-beating bots for all conditions.
According to your risk aversiveness, you can select and rent a trading bot without having to code, which is suitable for beginners, while those who create bots make money from the subscription.
How Do Trality Arbitrage Trades Work?
The Trality crypto arbitrage bot, coded in Python, offers advanced functionality for backtesting, trade execution, and the implementation of various trading strategies. For the end user, you don’t have to code, rebalance, or even connect the APIs. You just quickly select the bot you want to use, test it, and run it with real capital.
Why Do Crypto Arbitrage Trade?
So why do crypto arbitrage trading? For starters, you must decide if this is the right approach. As discussed in the beginning, crypto arbitrage trading is for people with more capital, time to follow the crypto market, and knowledge and research skills to find these opportunities.
Cryptocurrency arbitrage trading offers a low-risk opportunity to generate extra income by leveraging price discrepancies. Adding more tools to your trading arsenal is beneficial, and the listed trading bots allow for additional set-and-forget trading activity.
In instances when the cryptocurrency market remains stagnant for prolonged periods, such as the ongoing period since March 19th, where there is a lack of noticeable trends and range trading may trigger multiple stop losses, cryptocurrency arbitrage presents a suitable approach to remain engaged in the market.
Below, we will list some benefits and disadvantages of arbitrage trading so you can better understand why you should do it and if this is the right approach for you.
Benefits Of Cryptocurrency Arbitrage
There are many possible benefits of moving money across multiple exchanges and using crypto trading bots in performing crypto trading.
Lower Risk
Arbitrage trades, if done correctly, carry lower risk. Arbitrage traders exploit market inefficiencies, executing trades within minutes or seconds when utilizing crypto trading bots. Unlike other trading strategies that rely on trend prediction or long-term holding, arbitrage traders focus on their observations rather than market predictions.
You can quickly capitalize on the smallest price discrepancies and earn a guaranteed profit on the price difference without worrying about market volatility.
Diversity Of Opportunity
Unlike other trading strategies that involve catching a trend, arbitrage traders are looking at many potential opportunities at hand. The cryptocurrency market is highly correlated, so we mostly see a unanimous trend across crypto assets. It is only a question of what moves first and what moves quicker, but the direction is always the same.
This means that directional trading is limited, and the hedging opportunities are minimal. Crypto traders usually bet on this trend, and regardless of the crypto assets they hold, their risk exposure is greater as they are either right or wrong in all cases.
Lack Of Competition
Most crypto traders aren’t doing crypto arbitrage. They are either holders managing a portfolio of crypto assets or directional traders. This means there is far less competition and a greater chance of success and of finding these cryptocurrency arbitrage opportunities.
If there were many cryptocurrency arbitrage bot traders, the cryptocurrency prices would all be the same on all exchanges, meaning that these price discrepancies would have been exploited. Utilizing crypto arbitrage bots can sound like something institutional investors would do. However, the big funds aren’t interested in dabbling around in the altcoin markets.
Algorithmic trading is what they primarily do, but with their high amounts of capital, they would move these low liquidity markets quickly, thus singlehandedly eliminating the arbitrage trading opportunities.
Disadvantages Of Crypto Arbitrage
Of course, as with all trading strategies, cryptocurrency arbitrage carries some disadvantages, or at least some things arbitrage traders should be mindful of.
Fees
The trading fees are the first thing arbitrage traders should consider when doing crypto arbitrage. All cryptocurrency exchanges have fees that can be maker or taker fees and deposit and withdrawal fees.
Depending on the approach, you should always consider the viability of your arbitrage opportunity compared to those fees. In certain cases, when employing a straightforward arbitrage trading strategy that involves buying an asset on one exchange and selling it on another, the withdrawal fees alone can surpass the potential profit.
Transaction Delays And Slippage
So you have calculated the fees and all checks out. The second important thing to note is the time component of your arbitrage trade. Namely how fast the transaction can occur. The arbitrage trading opportunity may be lost if you wait 10 minutes for the transfer between exchanges.
Or, if you are trading internally inside one centralized exchange, the question you should ask yourself is quantity and liquidity. If the order book is thin, you can potentially incur the cost of slippage that can temper your average price per coin.
If the liquidity is low, it can mean that the average price per coin would be significantly lower than the current one. And if that is the case on both the buy and sell sides, the slippage alone can make the trade unfavorable.
Know Your Customer Regulations
Knowing your customer isn’t a problem on its own. However, different jurisdictions apply different rules and regulations for cryptocurrency trading activities. Those potential regulations restrict some residents from trading cryptos outside their country.
If you want to capitalize on the price discrepancies according to the spacial arbitrage trading strategy – buying in one country and selling in another- check the KYC requirements of the exchanges where you find these price differences.
Best Techniques For Crypto Arbitrage
Crypto arbitrage opportunities can be found best on newly listed coins. We have already discussed this point, but to sum it up, as the coin hits the market after an ICO stage, the price discovery kicks in.
As it is listed on different exchanges and in multiple trading pairs, there can be an opportunity for an arbitrage trade. Keeping up with new listings can be viable since thousands of new coins enter the market daily.
These initial price discovery stages can be extremely volatile, with the price going parabolic in the first few hours. So, limiting your risk and utilizing trading bots for speed can go a long way.
Keep Up With Local Laws
Following the market news can also be a great way to find arbitrage opportunities. Those are especially true for news around regulation, whether positive or negative. For example, looking at the cryptocurrency market in China, India, or Venezuela, where there were bans or local currency devaluations, made the price of Bitcoin trade at a premium in those countries.
Making an account on those local exchanges can potentially be challenging, so keep in mind what we discussed in the previous paragraphs about KYC.
Limit Your Exposure
Arbitrage opportunities aren’t risk-free but low-risk. That means that there is risk involved. Like in all trading, you should limit your exposure to the level you are comfortable with. Always be mindful of the risk/reward ratio. It would be very bad if you risked a lot of capital to make a small gain.
Set aside a small portion of your portfolio for arbitrage trades, and never risk all of your capital.
Is Cryptocurrency Arbitrage Profitable in 2024?
Arbitrage trading will always be profitable if done according to the rules and guidance provided in this article. A great thing about crypto arbitrage trading is that no matter what the market conditions, as long as there are price differences, you can make a profit.
Since there isn’t much competition in this area, and the market constantly expands into new financial markets, assets, and exchanges, arbitrage traders can still be very profitable in 2024 and beyond.
Without big institutional investors entering the market in this field soon, there isn’t a risk of big capital solving these market inefficiencies. For the time being, they won’t come soon as the regulatory landscape isn’t favorable for them.
So, suppose you have trading experience and want to diversify your trading activity further or are a beginner looking to start trading with low risk. In that case, arbitrage trading is a great way to deploy your capital.
Crypto arbitrage involves exploiting price differences in cryptocurrencies. It operates similarly to traditional arbitrage, where traders buy and sell the same asset in different markets to profit from varying prices.
Crypto arbitrage trading is generally legal in most countries as it contributes to market efficiency.
While crypto arbitrage can be profitable, the strategy tends to yield the highest profits when you have a substantial investment and access to arbitrage bots, as the price differences across exchanges are typically minimal.
