Crypto Arbitrage & Day Trading – Is It a Wise Strategy?

Crypto Arbitrage & Day Trading - Is It a Wise Strategy?

If you are not new to cryptocurrency trading, you probably already know at least some things about the arbitrage strategy. You may have even tried it.

Whether you have or have not, you should know some things about crypto arbitrate and whether it is a wise strategy in this market.

What is Crypto Arbitrage?

The concept behind cryptocurrency arbitrage is to capitalise on the liquidity, decentralisation, and the volatility of the crypto market.

The crypto arbitrage strategy takes advantage of price differentials across various assets and markets and the inefficiencies of the cryptocurrency market.

One of the factors used in arbitrage is that the different crypto exchanges offer a diverse number of buyers and sellers, as well as a wide array of trading specialties and preferences.

These are some elements that play a role in producing inconsistencies you will see between spot rates through the different markets and/or instruments like Bitcoin.

The Types Of Crypto Arbitrage

Crypto Arbitrage

Spatial Crypto Arbitrage

The easiest to use and simplest of this kind of strategy is the Spatial Crypto Arbitrage method. You will be looking at one cryptocurrency on two separate exchanges.

If the specific crypto is listed at different prices, traders will buy the cheaper and then immediately sell it through the higher priced platform, which is basically instant profits.

Here is an example: Let’s say you buy Ethereum from one exchange platform, transfer it to one that has it valued at a higher price, and then you sell it.

While this seems like a great strategy on the surface, it is not very efficient as it takes extra time for the transfer and it incurs more fees and other charges. 

Can that inefficiency be overcome? Apparently, traders will hold fiat currency in one platform and crypto in another.

Then, when the opportunity is presented, the same order for buy and sell can be placed simultaneously on both exchanges. 

This method allows one to perform these trades without having to transfer between the exchanges, which incurs fewer charges and fees and is a more efficient use of time.

Triangular Arbitrage

This form of arbitrage in the cryptocurrency realm is more complicated than the Spatial form because it involves using three trades as opposed to just two.

These trades are also performed within the same exchange platform. 

In this arbitrage strategy, the trader is looking at three cryptocurrencies, and trading through them all until they come back to the original digital asset. 

An example of this crypto arbitrage strategy is to see an opportunity in the Ethereum and Bitcoin exchange rates.

The idea here is to exchange Bitcoin for Ethereum, which in turn can be traded for another coin, like Ripple, and then back to Bitcoin. 

If the spot rates are inconsistently aligned, this trader may wind up with more Bitcoin than they started the process with, even though they traded around a loop.

Flash Loan Arbitrage 

This form of crypto arbitrage is even more complex and a bit tricky sine you will be using advanced technologies that back altcoins as well as lending approaches.

The Flash Loans offer instant crypto loans, allowing traders to borrow ample amount of digital assets without having collateral.

The concept here is to take advantage of the variety of interest rates offered by Flash Loan providers.

Other Crypto Arbitrage

The above are only three of several arbitrage methods for trading cryptocurrencies. Traders inside and outside the altcoin realm have ample opportunities to cash in on this strategy.

What are the Benefits of Cryptocurrency Arbitrage Strategies?

  • Quick Returns – You can get fast profits/gains in the market by leveraging the inconsistencies and fluctuations on various exchanges for various coins. These inconsistencies happen over a short time period, therefore, profits are made quickly as soon as the orders and trades are completed. 
  • Ample Opportunities – With more than 500 exchanges and 4,000 plus cryptocurrencies across the globe, you can only imagine the range of opportunities for arbitrage. The chances of these opportunities coming to you are virtually limitless. 
  • Crypto’s Volatility – The very thing that makes crypto so appealing is also the very thing that presents highly profitable arbitrage opportunities. That thing is the market’s volatility. Just look at Bitcoin as it experiences wild ups and downs. Since digital currencies are decentralised, the idea of it being a volatile market is almost a surety.
  • Immaturity – Unlike standard fiat assets, digital assets have not been around for a long time. The youth of crypto alone supports an irregular, disorderly environment for trading between exchanges. The fact that some are less established than others also plays a role in the vast opportunities for crypto arbitrage to be profitable. 
  • Competition – Even though crypto’s popularity has been on the rise and continues to rise, the youth of the concept and the fact that there are fewer people trading digital assets creates lower competition. The competition is much lower for cryptocurrency trading than fiat currency trading. 
  • Price Differentials – Price differences play a huge role in digital currency. The pricing inconsistencies can range from 3% on the low end and up to 40% on the high end. There are ample opportunities for crypto arbitrage.

What are the Risks of Crypto Arbitrage Strategies?

Crypto Arbitrage
  • Regulations – Just because there are literally thousands of digital currencies available and hundreds of cryptocurrency exchange platforms on the market, does not mean everyone everywhere has access to them all. There are KYCs (customer regulatory restrictions) that limit how many you can access. Other regulations may require that certain exchanges to require identity proofs or bank account information before they will approve an account.
  • Fees – When you calculate how much to deposit and trade at any given time, you must also factor in the trading charges and withdrawal and deposit fees taken in the process. Almost all exchanges charge fees for trading.
  • Security – Security online is always a risk no matter what you are doing. The digital assets’ industry is no exception to this issue. While the profitability of storing some of your digital assets on reputable exchanges is high and helps to decrease the time requirements of trades, there is also the potential for increased in security risks. What is worse is when you store your gains in multiple wallets or accounts, your assets are at even more risk of getting hacked for one or more of them.
  • Volume Requirements – Because of the small profits availed via cryptocurrency arbitrage, the amounts of capital required will be larger if you plan to generate higher and better profits. 
  • Timing – Timing is everything on the crypto market. Arbitrage opportunities come and go quickly. Due to the small window of time within these opportunities, traders must be diligent and vigilant to grab that brass ring when it is available.

Cryptocurrency Arbitrage Bots

One way to overcome the issue of timing, is to enlist help from crypto trading bots that support arbitrage strategies.

Bots come in handy with their tools and coding that boosts your chances of successful arbitrage trading.

The two main paths you can use for arbitrage bots are writing your own if you are good at coding, or using prebuilt coded bots.

Many traders choose the prebuilt bots for their arbitrage since, again, it saves time, and it maximizes your success. 

Each bot has its own features, specialties, and approaches to suit the differences in the ways traders want to use this type of trading.

It is wise to do your due diligence when choosing such technology to avoid the pitfalls of getting scammed versus the upsides of gaining profits.

Read reviews before using premade crypto arbitrage bots. You also need to know if your exchange(s) support this technology.

Before choosing a premade bot, be sure to read reviews and avoid the malicious individuals who are out to steal your assets instead of helping you win on the market. 

There are also crypto trading forums where bots and any malicious entities are discussed to help you avoid being vulnerable to them. 

That said, the traders who want to have more control over their digital assets and arbitrage strategies will develop their own bot.

To do this, you will need some programming knowledge and time. 

Top-rated Crypto Trading Bots

RankCrypto BotPrice
1Pionex100% FREE
2CoinruleVisit
3BitsgapVisit

Cryptocurrency Arbitrage Tools & Software

Besides using automated crypto trading bots, you and also supplement your digital asset strategies with other types of tools and pieces of software.

Some available tools include scanners, finders, charts, and other information to help you be a better trader. You may even sign up for alerts from Telegram to stay on top of the markets.

Did you know that arbitrage can be performed without using your computer? You can use your smartphone or tablet when you install apps like Crypto Arbitrage Pro APK.

These apps offer built-in calculators and matrices developed by experts to help you trade efficiently.

What You Should Look for In a Cryptocurrency Arbitrage Platform

Crypto Arbitrage

The ideal platforms will support your currencies and your exchanges will support the arbitrage tool or bot you want to use.

The more cryptocurrencies and tools are supported, the easier it is to find solid arbitrage opportunities. 

Be sure to engage with platforms that use dedicated APIs for maximizing your security. They should also have built-in tools, support external bots, and allow automatic trading.

If you want to maximize your gains, look for platforms with low fees, and a wide array of withdrawal and deposit options.

All this will help you find the ideal arbitrage options for you.

Final Thoughts on Crypto Arbitrage

Essentially, crypto arbitrage is not a strategy like any other in the industry. It may interest you to know that conventional arbitrage has been on the decline in recent times due to improved networks and stricter rules.

The decentralisation of Bitcoin and other cryptocurrencies offers steady volatility, which provides excellent and many opportunities to take advantage of arbitrage.

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My diverse background started with my computer science degree, and later progressed to building laptops and accessories. And now, for the last 8 years, I have been a social media marketing specialist and business growth consultant. In my spare time I dabble in crypto and various types of automation.

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Jonathon Spire

Jonathon Spire

Tech Blogger at Jonathon Spire

My diverse background started with my computer science degree, and later progressed to building laptops and accessories. And now, for the last 7 years, I have been a social media marketing specialist and business growth consultant.

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Jonathon Spire

I blog about a range of tech topics.

For the last 7 years I have been a social media marketing specialist and business growth consultant, so I write about those the most.

Full transparency: I do review a lot of services and I try to do it as objectively as possible; I give honest feedback and only promote services I believe truly work (for which I may or may not receive a commission) – if you are a service owner and you think I have made a mistake then please let me know in the comments section.

– Jon