How To Make Money With Crypto Arbitrage
There are many ways to make money in the world of cryptocurrencies. Some of these are really common ones and most people already know about them. These are trading for bitcoin profits, mining, buying and holding and more. However, there is one more way that is not often talked about much. But, this can be a really great and simple way to make some money.
This method is known as crypto arbitrage. It is quite an unconventional way of making money in the crypto world. Therefore, it is not discussed as often as other methods of making money. If you take some time to understand how it works, you can make some steady money. The following goes into more detail about crypto arbitrage.
What Is Crypto Arbitrage?
Crypto arbitrage is a way to earn profits using the difference in prices of crypto in different cryptocurrency exchanges. As you may already know, there are many different cryptocurrency exchanges that you can trade on. Also, you might have noticed that the prices of any particular crypto are slightly different across these exchanges. There are many reasons for this difference but the most important one is liquidity.
These differences in prices provide a great opportunity for traders to earn a profit. The principle here is the same as that of trading. You buy low and sell high. Only in this case, there are more than one exchanges involved. So, in essence, you are buying low on one exchange and selling high on another. You can do this again and again until the prices are different. Also, you can repeat it for as many different assets as you want.
Example of Crypto Arbitrage
To understand the concept, we can take an example. We will discuss what smaller traders usually do.
Let’s say, you see that bitcoin has a higher price in exchange A and a lower price in exchange B. Then, you can sell your bitcoin on exchange A and transfer the stablecoin to exchange B. In exchange B, you buy bitcoin at a lower price and make a profit.
It can also be done in the other way. You can buy bitcoin on exchange B and transfer it to exchange A. Then you can sell it on exchange A for a profit. In both the scenarios you make a profit. In the first one, you profit in bitcoin. In the second one, you profit in stablecoin.
There is also a third scenario in which you don’t actually transfer any crypto between exchanges. Let’s continue with the above example. You can buy $1000 worth of bitcoin in exchange B and sell $1000 worth of it on exchange A. The net effect will be a profit. This is what advanced traders do. This saves them the transfer fees.
How To Make Money With Arbitrage
This is a really simple process and you don’t have to do anything extraordinary. You can follow the below instructions:
1. Make sure you have an account on two or more exchanges.
2. Keep an eye out for the differences in the price of any crypto across these exchanges. You can also use a price tracker app for this purpose.
3. As soon as there is a significant price difference, buy low and sell high. You can follow any of the three scenarios mentioned above.
4. Rinse and repeat.
Things To Be Careful Of:
Although arbitrage can be a really simple thing to do, there are some things to be careful about. Otherwise, you will not only miss the profits but could also make a loss. The following are some of the things to be aware of:
Crypto markets are highly volatile. Prices can change significantly at the drop of a hat. Therefore, you need to make sure you capitalize on the opportunities really fast. The best practice is to not involve crypto transfers. This can take some time and prices may change during that time. Therefore, it’s best to spread your crypto (including stablecoins) across exchanges. Although, this may not help you take advantage of every situation.
2. Transaction Fees
Virtually all exchanges charge a transaction fee. When an arbitrage opportunity presents itself, you must factor in these costs. It is easy to just do simple calculations. However, your net result may be break-even or loss if you are not careful. It is the net result that should be calculated.
3. Withdrawal Halts
Crypto markets are still new and hence are quite inefficient. There might be times when there are huge differences in prices across exchanges. During such times, exchanges may stop withdrawals temporarily. If you do not check this before selling your crypto, it might be bad for you. Especially if the prices rise immediately after that.
Using Automation Programs
The crypto world is a result of technological innovation. Therefore, it is not surprising that traders use the best technology to make profits. Even to take advantage of arbitrage opportunities, advanced traders use something called automation programs. In the earlier days, it was difficult for beginners to take advantage of these. Advanced traders had their custom bots using their custom algorithms.
Today, however, it is easier than ever for smaller traders to use automation programs. There are several platforms that offer software to help you do so. This software does all of the work for you. It discovers arbitrage opportunities and even executes trades. You just have to plug in your own preferences. The best thing is that the software can do this for 24 hours a day. So, it can make money for you even if you are asleep.
A list of some platforms offering automation:
But, as with anything else, there might be risks associated as well. Bots can only do so much. If you feel like you don’t want to take the risk, you can do all of this manually as well. You can do many transactions of smaller amounts and make profits in the long-term.