Cryptocurrency Arbitrage Trading: A Low-Risk Trading Strategy Anyone Can Deploy

Person holding a gold coin with a bitcoin symbol.

Arbitrage trading is seen by many as fool-proof profit. This simple trading strategy has been used for hundreds of years to help generate low risk, and in some cases, all-but-guaranteed, profit. That begs the question: “Is crypto arbitrage trading a strategy that you should try?” 

To help you decide, here are the basics of arbitrage trading, crypto arbitrage, arbitrage bots, and some of the risks of arbitrage trading.

What is Arbitrage Trading?

Arbitrage trading involves capitalizing on a situation where an asset is priced low in one place and higher in another—at the same time. If you are able to buy it for the low price and then sell it for the higher price before it goes up, you can make a profit. The concept is literally that simple.

For example, imagine a company’s stock is listed on both Nasdaq in New York and the Tokyo Stock Exchange in Japan. In New York, you can buy the stock for $20.00 a share. However, you notice that in Tokyo, you can sell it for $20.50. If you have accounts that give you access to both markets, you can buy in New York and sell in Tokyo a couple of seconds later for an instant profit. That’s arbitrage trading. Crypto arbitrage trading is very similar.

How Does Arbitrage Trading Work in Crypto?

Just like in other forms of arbitrage trading, crypto arbitrage is based on exploiting price discrepancies. Here are some of the factors that give rise to arbitrage opportunities:

  • Inflation: The price of a currency can go up in one area of the world while staying low in another because of differences in inflation. For example, if inflation pushes up prices in Algeria, the price of cryptocurrencies may go up as well. If those same cryptos remain unchanged in the U.S., an arbitrage opportunity may present itself.
  • News events: News events can cause prices to go up or down sharply and quickly. For example, if major legislation is passed in the U.K. that people broadly interpret as bad for the economy, the value of the pound may plummet. The cost of buying bitcoin could go down as well—but only in the U.K. If the price remains high in another area, there may be favorable conditions for an arbitrage trade.
  • Slow server connections: Every exchange needs to communicate through a server in order to get prices. If an exchange has a slow connection, there may be precious milliseconds between when the price moves and the exchange gets that information. With some trading bots, it’s possible to buy low at the fast exchange and sell higher to the slower exchange.

What Are Some Cryptocurrency Arbitrage Strategies?

There are a few different crypto arbitrage strategies that traders have adopted. Here’s a basic breakdown:

  • Spatial – When two platforms have different prices
  • Cross-border – When there is a price discrepancy due to differing economic conditions in two or more countries
  • Statistical arbitrage – Using algorithms to catch momentary differences in price
  • Triangular arbitrage – Trading works in a currency “triangle.” For example, you could buy bitcoin with USD, then buy the Swiss franc with your bitcoin, then buy USD again using your francs.

How Arbitrage Trading Bots Can Help

White robot with blue eyes.

Naturally, it’s virtually impossible to see all arbitrage opportunities available at any given moment—even if you’re focusing on only a few exchanges and one or two cryptos.

With arbitrage trading bots, its possible to both see the opportunities and capitalize on them in fractions of a second. The bot spots the discrepancy and executes the trade for you.

The Risks of Crypto Arbitrage Trading

So, if crypto arbitrage trading is so easy, why isn’t everyone doing it? The answer is two-pronged: You can lose money because of fees and because the discrepancy disappears before the trade can be executed.

Fees: The fees associated with trading digital assets are so high they preclude arbitrage trading. If you could make $200 off a trade, but after everything has been settled are looking at fees amounting to $205, it wouldn’t make sense to pull the trigger.

The Arbitrage Opportunity Disappears: Often, arbitrage opportunities are short-lived because one or both of the markets adjust. If this happens during your trade, you may end up losing money.

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Arbitrage trading, in the right conditions and with the right technique or bot, can potentially produce handsome profits. Do your research, and assess your risk tolerance before making a decision about whether to try arbitrage trading or not.

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