Cryptocurrency Arbitrage: What it is and How It Works

There are different ways of generating consistent profits from buying and selling cryptocurrencies. Crypto arbitrage is a popular method that involves making decent profits from price differences in different cryptocurrency markets.

Read on to learn how it works and how you can benefit from it.   

What is Cryptocurrency Arbitrage? 

Arbitrage involves:

1. Buying securities in one market
2. Selling them in a different market at a higher price
3. Pocketing the price difference as profit

In arbitrage, traders maximize the variation in asset prices across other markets.  

Cryptocurrency arbitrage operates on the same principle; it typically happens using two different crypto exchanges with different prices. Traders buy digital assets at lower costs and sell them at higher prices on another exchange. 

Whereas smaller exchanges could follow the larger ones in pricing matters, they don’t always do, creating differences in pricing. The market inefficiency between larger exchanges offering high prices and smaller ones offering lower prices creates opportunities for arbitrage traders. 

Types of Crypto Arbitrage 

There are three different ways you can invest in crypto arbitrage, including the following: 

Spatial Arbitrage

Spatial arbitrage occurs when you trade cryptocurrencies across different cryptocurrency exchanges. While spatial arbitrage may be a straightforward way of conducting business by being tactical enough to take advantage of price discrepancies, you must be careful enough to avoid the risks caused by costs and transfer times. 

Spatial Arbitrage without Transfers

In trying to elude the risks associated with transfer costs and time posed by spatial arbitrage, some people go long on a cryptocurrency on one exchange and short on a different crypto platform and wait for the prices on both digital platforms to converge. By staying, they avoid transferring their crypto assets from one exchange to another and only pay trading fees.  

Triangular Arbitrage

In triangular arbitrage, traders take advantage of price differences among existing pairs on the same cryptocurrency exchange. In this case, the trader begins with one cryptocurrency and trades it for a different cryptocurrency on the same digital platform. The trader is careful to choose crypto of a lower value relative to their initial asset. 

Once that is accomplished, the trader will trade the cryptocurrency they bought for the third one with a relatively higher value than their initial cryptocurrency. Eventually, the investor sells the third cryptocurrency for the first one and makes a profit after completing the circuit.  

Benefits of Cryptocurrency Arbitrage 

The main advantages of getting involved in cryptocurrency arbitrage include: 

Low Risk: There is less risk involved than long-term involvement because you buy and sell simultaneously.

Take Advantage Of Market Volatility: Arbitrage works well during market volatility without fear of risks. 

Works during Bull Or Bear Markets: even though bull markets offer more significant opportunities to arbitrage traders, you can still make money regardless of the market direction. That’s because bull markets are more important to traders than arbitraging.

How to Benefit from Arbitrage Trading 

Cryptocurrency arbitrage is certainly profitable as long as there are price differences. However, it’s not a get-rich-quick scheme, and, as such, you need to tread with care. 

You want to remember that apart from the existing price differences, the issue of transaction fees between crypto exchanges can still make a big difference. This may not be a big issue when you’re thinking long term, but if you’re trying to do arbitrage, the margins can be too tight not to consider fees since even the smallest fees can be significant, so watch out.

We can comfortably say that crypto arbitrage remains less risky than all other types of trading. If you’re buying and selling crypto on two exchanges simultaneously, you might not always make an enormous profit, but you generally won’t make more than a slight loss either.