Arbitrage on the Bitcoin Exchange
Many of you have undoubtedly heard of cryptocurrency arbitrage and may have even wished to make financial transactions on famous exchanges like Binance or Bitfinex.
Cryptoauxiliary will explain what Bitcoin arbitrage is, how it works, and how to profit on crypto market peaks in this post.
Arbitrage Trading is a type of trading in which two parties
The word "arbitrage" connotes a fair deal. However, any economics-related dictionary would tell you that arbitrage truly refers to taking advantage of pricing differences among markets.
The concept is straightforward: suppose Bob wants to profit on a Bitcoin price fluctuation and purchases 1 BTC on crypto exchange A. Now that he has 1 BTC, he searches for other exchanges where the price is higher than the one he paid for it, and sells when he finds it.
Arbitrage trade can be divided into numerous categories:
Arbitrage of space. Trading in multiple marketplaces at the same time is referred to as this sort of trading. In the preceding paragraph, Bob was holding 1 BTC, and this approach was outlined.
Arbitrage of time. Time arbitrage is defined as trading the same funds in the same market in order to profit from price fluctuations. However, unlike space arbitrage, it cannot be done at the same time.
Because time arbitrage is so closely linked to price prediction, it proves to be far more difficult to execute. As a result, trading cryptocurrency on various markets is simpler and involves fewer risks.
Cross-Exchange Arbitrage Space, also known as cross-exchange arbitrage, is a method of profiting from inefficiencies in an exchange, broker, or financial system. As a result, a trader makes money by buying crypto at a lower price on one exchange (or from another trader/broker) and selling it for a higher price. This is why arbitrage trading has become so popular in recent years.
Let's take a closer look at some cross-exchange trading schemes and compare them.
Schemes for Trading in Different Currencies
This type of trading is described quite simply in a general explanation of arbitrage; however, even the simplest deals can have pitfalls and disadvantages. All of this will be revealed by Cryptoauxiliary, preventing future traders from making mistakes.
Going back to the example with varying pricing on two exchanges: Bob buys 1BTC for $10,000 U.S, and sells the same 1BTC on another exchange for $10,500 U.S. As a result, Bob’s profit is $500 U.S; however, this is a so-called “dirty margin,” which, when turned into a “profit margin,” will be considerably lower. Here’s why:
It only sounds that simple: buy cheap, sell for more. In reality, crypto exchanges also need to profit, so traders pay fees for the actions they do on an exchange:
transferring money from the outer wallet to the exchange storage
depositing money (this point refers only to certain exchanges, like HitBTC and Bitfinex)
buying crypto on exchange A \stransferring money between two exchanges \sselling crypto on exchange B \swithdrawing money from the Exchange B.
Obviously, there is no use trading Bitcoin if the cross-exchange spread (the difference between Bitcoin quoting on two exchanges) is lower than 2 percent . This is why people who trade consider the fees and work on different schemes that help reduce transaction fees.
The issue of liquidity is definitely one of the most crucial elements when conducting arbitrage deals. Due to the fact that a high level of cross-exchange spread mostly takes place among low-liquidity altcoins with low trade volume, big deals are also difficult to accomplish.
Professional arbitrage dealers predominantly work with cryptocurrency in big amounts, which helps decrease transaction costs.
Additionally, it’s worth mentioning that a lot of dealers are chasing arbitrage profit at the same time. So, with a considerable price difference between two platforms, assets will be bought quickly. Therefore, a dealer may lose his/her profit.
Price Change Risk
All actions for cross-exchange arbitrage should be done concurrently, as there is a high probability of spread or quoting. Change in these factors can make the deal detrimental.
Most frequently, the risk described above arises when money transfers from one exchange to another. The reason for delay could be technical work being done by the development team, or blockchain overload.
The main problem in arbitrage trading scheme #1 is the requirement for fast money transfers. In scheme #2, Cryptoauxiliary reveals the way to get rid of this issue.
Let’s imagine that Bob owns 100 ETH and 4 BTC, and stores them on two exchanges in 50/50 proportions in order to spread the risk.
Step 1. Bob buys 50 ETH on one exchange (for the BTC he has on the same exchange).
Step 2. Bob sells his 50 ETH on another exchange.
Step 3. Bob makes two money transfers between two exchanges in order to balance the funds.
This arbitrage approach is more likely to serve in the long-term perspective rather than for instant profit.
Disadvantages of Scheme #2 \sLimited mobility. Bob is tied to two exchanges and has to wait until a convenient moment that promises a profit.
High transaction fees. After the buy-and-sell operation, Bob will need to make two money transfers to balance out the funds. He will have to pay extra fees.
Scheme #3: Intra-Exchange Arbitrage
There is also the possibility of making a profit on a single exchange in the following situation:
bitcoin arbitrage strategy
As a result of conducting this scheme, the dealer will get a $500 USDT profit minus transaction fees.
This kind of scheme can have more than three assets; however, the longer the process, the higher the fees.
Disadvantages of Scheme #3
The meanest enemy of any arbitrage deal is the possibility of a fast quoting change. If the targeted coin prices go down, the deal can even cause financial loss.
Bitcoin Arbitrage Opportunities
Crypto exchanges have differences in price due to the fact that markets are not linked directly, and very often, prices can differ by a percentage. However, if several traders use the opportunity to profit from this difference, the prices emerge. Then the risk of playing a losing game pops up.
In order to find the best available rate on the market, there is Challengly, acting as an intermediary between crypto exchange and a user, that selects the best crypto trade and makes the process effortless for those investing in crypto.
The coin of the most popular blockchain development company Bitcoin and its exchange arbitrage opportunities are tracked in different communities. One of them is SFOX Trading on Twitter, where the dealer states how much others could earn from exchange pairs:
Bitcoin Arbitrage Pairs Twitter
As we see from the screenshot, there is always an opportunity to earn money on price volatility. However, would $37 U.S. cover all fees, and would the price stay the same within the time frame of the arbitrage deal? It’s very unlikely to be a good deal to depend on unless the dealer has a team or a bot that conducts buying and selling and operations on different exchanges simultaneously.
There are some circumstances that dealers have to take into account. Arbitrage dealers should consider that putting fiat in an exchange wallet would take one to three days. If he/she works with a foreign currency, moving fiat from the exchange to an international bank would take other several days. Moreover, the deal should be big enough to cover all fees.
Let’s imagine that exchange A offers Bitcoin for a 0.40 percent higher price than an exchange B. Bob wires fiat from his wallet to exchange A and buys Bitcoin. He will have to pay 3 fees: a transactional fee for wiring fiat, a network fee, and a trading fee.
Then he moves his BTC to the wallet on the exchange B, and for this, he will have to pay another 2 fees: a network fee and a withdrawal fee (the same he pays when trading BTC on exchange B).
When the profit seems to be in his pocket, Bob has to exchange BTC to USD, and wire them back to his bank account, however, this will also cost him fees: a withdrawal fee, a wire fee, and a foreign exchange rate fee.
Eventually, Bob loses .
8 percent of the money he initially put in his wallet., The Bitcoin arbitrage “opportunity” doesn’t consider the risk of the price going down on exchange B. It is essential for the Bitcoin blockchain development company and its coin’s arbitrage dealers to consider that cryptocurrency prices fluctuate constantly. Rates can go up and down several times within one minute.
As you can see from the Coindesk Bitcoin price report, the rate went up by $160 USD in only one hour. In the case of a drop in price, this could drastically change the outcome of an arbitrage deal.
Bitcoin Arbitrage Strategies
Conducting arbitrage deals can’t be considered a risk-free business in terms of price volatility and delays, so the Cryptoauxiliary blockchain development company will share strategies that will help dealers calculate and minimise the risks.
If you see a certain profit and want to invest and earn on a crypto exchange (like Bob from our example), you will need to buy and sell without waiting until the money comes into your wallet on the exchange. In order to not lose the deal, you will have to keep money in your wallet at the exchange from which you want to engage in arbitrage.
One of the most famous Bitcoin arbitrage strategies is keeping the same amount of fiat and BTC on two exchanges concurrently. By following this strategy, the dealer won’t lose time wiring money; he/she will instantly buy BTC on exchange A and sell it on exchange B (scheme #2).
Checking through the top crypto exchanges will definitely provide Bitcoin arbitrage opportunities; however, checking order books will show even better results.
Order books are real-time lists of rates of all cryptocurrencies that reveal the gap between supply and demand. This is a Bitcoin arbitrage tool that connects all markets on one page. Let’s review an example of a Bitstamp order book:
Bitstamp Order Book
Bids and asks are shown in pairs that result in a trade if both sides meet the requirements.
The Most Popular Arbitrage Websites
The order book is one of the most convenient Bitcoin arbitrage tools. It collects and shows data on cryptocurrency rates and puts orders to buy (bids) or sell (asks) in a list on different exchanges. This is the exact case we will talk about in this chapter: Bitcoin exchanges.
Cryptoauxiliary lists the top 5 exchanges that are worth your attention.
Launched in July 2017, this China-based trading platform has already been hacked. Instead of making the project go down, this only made it stronger and more popular.
The trading fee on Binance stands at 0.1 percent of the transaction sum, and withdrawal fees vary. Binance also boasts high liquidity and multi-language support.
Binance supports over a hundred of successful cryptocurrencies; however, unlike Coinbase, it doesn’t support fiat currencies, which means traders can only hold cryptocurrency on Binance.
A San-Francisco-based crypto-trading platform, Coinbase is one of the most popular Bitcoin arbitrage tools among traders.
Coinbase is famous for its high liquidity and instant-buy feature. It supports top cryptocurrencies such as BTC, BCH, ETH, LTC, ETC, ZRX, BAT as well as over 50 fiat currencies.
Trading on Coinbase can become quite costly in terms of on-platform fees. The deposit fee for a bank transfer is 1.49 percent , a wire transfer is $10 U.S, and a USD wallet would cost a dealer 1.49 percent . In terms of withdrawal fees, bank transfer and wallet fees are the same; however, the withdrawal fee is higher, at $25 U.S.
Coinbase is a digital cryptocurrency exchange. Coinmama, another famous platform for buying and selling crypto, is a cryptocurrency marketplace.
The exchange boasts a huge number of customers (over 200,000), and both BTC and ETH buy-and-sell opportunities. In addition, it supports some of the most successful cryptocurrencies: ETC, BCH, LTC, ADA, QTUM, and XRP. However, the only fiat currencies available on Coinmama are USD and EUR.
While Coinbase limits its deposit methods with only credit and debit cards, Coinmama sustains deposit opportunities for debit and credit cards, SEPA, and even cash.
There is no withdrawal fee; however, transfer and deposit fees are much higher than on Coinbase: 5.90 percent for trading and 5 percent for deposits.
There are many crypto exchanges on the market that offer the same services and provide subtle differences. One popular exchange that is similar to Coinbase and Binance is Bitstamp.
This is a digital cryptocurrency exchange, but it isn’t famous for adopting a lot of fiat or cryptocurrencies: EUR, USD; BTC, BCH, LTC, ETH, or XRP.
Bitstamp allows payments in a limited number of currencies, but not deposit methods: if a dealer wants, he/she is able to pay with a credit or debit card, bank transfer, cryptocurrency, or a wire transfer.
Bitstamp, like the majority of trade platforms, charges a trading fee that fully depends upon how active a user is as a trader, judging from his/her 30-day history.
Even though Bitstamp is a young exchange, founded in 2017, it has a limited number of altcoins, unlike Kraken — the old-timer of cryptocurrency exchanges.
Kraken is one of the oldest crypto exchanges, and it is also one of the most trusted. For instance, in Japan, Kraken is regulated by the government, even though the exchange is based in the USA.
Kraken is a sophisticated platform for professional traders. It supports up to 20 of the biggest cryptocurrencies on the market as well as five fiat currencies: USD, EUR, GBP, JPY, and CAD.
One of the biggest disadvantages of Kraken as a trade platform is its set of limitations in terms of deposit methods: it allows only electronic payments plus bank and wire transfers.
Despite the disadvantages mentioned above, there are several advantages users can expect to encounter when entering any crypto exchange. Kraken is trusted and has low fees. Proof of the trust granted to Kraken can be found in the fact that the Japanese government and European banks regulate it.
Bitcoin Arbitrage Obstacles
Bitcoin arbitrage deals seem so simple to conduct to earn an easy profit, so why isn’t everyone in the world doing it? Well, cryptocurrencies are not regulated by all countries, so crypto exchanges need to meet some of the requirements before everybody can use them:
One of an example of obstacles caused by KYC (Know Your Customer) regulations is the need to own a bank account in the country where the exchange is based. Also, to start trading, the account should be verified, which usually takes a bank about a day.
To avoid waiting until the money is wired to an exchange, and to be able to use it as soon as there is a profitable arbitrage deal, users should be aware of the risks connected to storing currency in an exchange wallet. There have been multiple hacks of even the biggest and safest crypto exchanges, which means promising safety doesn’t mean providing it. Cryptoauxiliary may, however, make one tip to traders in order to protect their funds: store money in cold storage.
Fees As was evident from the previous discussion of the most popular exchanges, many trading platforms demand significant fees for any activity done on the exchange. Trading becomes a costly activity as a result, which leads to the next stumbling block.
Deals of a magnitude are required.
Traders that trade on exchanges with high fees will have to look primarily for huge deals in order to profit; otherwise, they would barely break even.
Limitations on Withdrawal
Crypto exchanges are a huge target for hackers, thus the creators of cryptocurrency exchanges go to great lengths to protect their users. As a result, several exchanges impose daily withdrawal limits. On the one hand, a hacker will be unable to take more than the daily limit; on the other hand, users who execute high-volume transactions would experience some inconvenience.
Execution at the Right Time
The ability to complete a contract on time is the most crucial prerequisite in arbitrage trading. Because of the volatility of the market, buy-and-sell actions take time, and the price can decrease or rise during that time. This is especially true in the case of cross-exchange transactions. This is why the majority of dealers deal with stable coins created by Bitcoin and Ethereum blockchain development firms.
Cryptoauxiliary has enumerated the activities that must be followed for money protection in order to limit the risks associated with arbitrage trading:
Research. To remain up to date and calculate profit in terms of currency perspectives, look through all conceivable lists of cryptocurrencies and their attributes.
Choose cryptocurrencies with faster transaction times. Bitcoin is frequently criticised of transaction delays and slow transactions when compared to Ethereum. Ethereum allows for speedier transactions, reducing the chance of transactions not being completed on time.
Make a list of everything you want to do. When it comes to market volatility, traders should always stick to a specific plan or strategy to avoid losing money.
Trustworthy exchanges are the only way to go. Use crypto community chat rooms like Reddit to keep up with the most recent exchange reviews. Staying on top of the crypto market will help you stay informed and locate the best bargains. These are the ones we recommend:
Bitmex \sDeribit \sHuobi
Don't keep all of your money on one exchange. The finest advise a trader can provide to another is to never risk more money than you can afford to lose. This has nothing to do with the possibility of being hacked, but it will speed up cross-exchange transactions.
Aspects of Bitcoin Arbitrage from a Legal Perspective
When interest in a particular arbitrage trade grows, prices begin to merge. This is not only legal, but it is also beneficial to the entire market. Bitcoin arbitrage trading is allowed in most countries, however it is banned in a few – primarily because these countries lack cryptocurrency rules. As a result, trading cryptocurrency isn't entirely legal.
Unlike the United States and Japan, which allow crypto exchanges, India has declared Bitcoin and, by extension, Bitcoin arbitrage to be unlawful.
Arbitrage in DeFi
Interest rate differentials between DeFi platforms are used by interest valuation arbitrage within DeFi development businesses. When there is a difference in interest rates between centralised and decentralised platforms, DeFi/CeFi arbitrage survives. Carry-trade strategies, on the other hand, can be used to take out a loan against a low-interest asset in order to invest in a higher-profit asset.
Although, from the borrower's standpoint, all current DeFi platforms and DeFi development companies rely on high collateral obligations, which limits arbitrage opportunities.
There are various possible market flaws in both DeFi and CeFi platforms, which can be linked to the following causes:
platform-related uncertainties: interest scale volatility, possible smart contract challenges, ambiguity in loan negotiation, repayment jeopardies, etc. the emergence of new blockchain solutions for DeFi (weak liquidity as evidenced by leverage and daily transaction volumes (relative to CeFi); platform-related uncertainties: interest scale volatility, possible smart contract challenges, ambiguity in loan negotiation, repayment jeopardies, etc.
After all, as the DeFi development industry matures, fewer fresh possibilities are projected to emerge. If the assets and platforms have similar risk characteristics, interest rates for each platform should be the same. However, new platforms and protocols, such as interest rate swaps, can expand the range of possible transactions.
Bitcoin arbitrage has proven to be a terrific way to gain a profit in a short period of time with little work, but it is not without risk. One of the most significant dangers is failing to execute on time, which occurs regularly when undertaking time-consuming cross-exchange trades.
Arbitrage traders should also consider the costs charged by exchanges. Traders should seek high-volume trades in order to break even.
When an exchange offers the most trustworthy security features, the chance of being hacked does not go away, thus traders should always take extra security precautions to protect their cash. Keeping cash in cold storage is one advice for improving fund security.
There are 227 crypto exchanges on the market, according to CoinMarketCap, and the number is constantly expanding. Only a handful of them, though, are trustworthy. Binance, Coinbase, Coinmama, Bitstamp, and Kraken are among the exchanges advised by Cryptoauxiliary.
If you have any further questions about crypto investing, blockchain solutions for DeFi, purchase or sale, exchanges, or developing a blockchain-based business, the Cryptoauxiliary blockchain adviser team is always available for effective conversation and collaboration.