Arbitrage means capturing the profit opportunities stemming from the price differences between different markets for an asset.
Assume an asset X is traded in two markets, market A and market B. If it is traded at 100 in marketplace A and 105 in marketplace B, one can enjoy a riskless 5% profit opportunity excluding transaction costs. And if you have $1000 in the capital, it allows you to make a net profit of $50, with just a few clicks.
In this video, we will show you step by step how it works. That way, you'll get to know all of our crypto arbitrage strategies.
So, watch this video all the way through so you don't miss anything.
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Now without further ado, let's get straight to the point.
Before you get into crypto arbitrage, you must first understand how cryptocurrencies are traded?
Cryptocurrencies are mostly traded in centralized exchanges. Users can bid or ask for the cryptocurrency that they want to trade and once a particular buy and sell order matches, the exchange of the assets are realized between buyer and seller.
Based on this logic, cryptocurrencies are traded 24/7 around the world. The same cryptocurrencies are traded on thousands of different exchanges such as Binance, Coinbase, FTX, Kucoin, Bybit, and many other exchanges.
Cryptocurrency arbitrage is profiting from simultaneously buying a cryptocurrency from an exchange and selling it on a different one with a slightly higher price.
The price of different cryptocurrencies is never the same on all exchanges.
The reason for these price differences is simple: This is because of local restrictions on cash transfers. Local Restrictions Imposed to Fiat Currency Transfers
Some countries restrict the flow of capital out of the country, leading to local cryptocurrency investors being barred from accessing the cryptocurrency markets outside the country.
That causes imbalances between supply and demand in the local cryptocurrency exchanges.
The most famous example of this situation is Kimchi Premium. In South Korea, there is tight capital control for cryptocurrency investors and foreign cryptocurrency investors are not allowed to trade in local cryptocurrency exchanges. Therefore, cryptocurrency prices in the country deviate from other cryptocurrency markets.
While these slight differences don't help absorb transaction costs, you can benefit from obvious arbitrage opportunities during periods of high volatility.
There are several reasons causing arbitrage opportunities between different markets.
If you check the price of bitcoin on all the exchanges, we mentioned earlier, you'll see that it differs, and that difference can sometimes be as much as $500 or $700.
For example, if you make a crypto arbitrage with 1 BTC, you can earn that $500 or $700 in a few seconds.
This technique is valid for almost all crypto depending on the platform.
Cryptocurrencies are prone to high price movements as history has shown. The prices can go down 20% and up 20% within the same day. Sometimes it may be impossible for traders placing orders manually to cancel their orders.
Also, some crypto exchanges may show slightly slower or quicker reactions to these price movements because of the liquidity differences between cryptocurrency exchanges.
For example, when cryptocurrency prices start to decrease, market orders in an illiquid exchange would cause prices to drop more severely, which also may give rise to arbitrage opportunities.
Now, how to identify cryptocurrency arbitrage opportunities?
In a broad sense, you can identify arbitrage opportunities in two ways, manual calculations, and automated screening.
Considering the number of exchanges and cryptocurrency pairs, the manual calculation does not seem like an option here.
The best way to identify cryptocurrency arbitrage opportunities is to create a cryptocurrency arbitrage bot, as these arbitrage opportunities appear for a very short time.
However, this is not enough to capture arbitrage opportunities. You need to have both fiat currency and cryptocurrency on the exchanges you are operating as you cannot know on which exchange you will be the buyer or seller in case an arbitrage opportunity arises.
One of the best things about the cryptocurrency market is that the market data is free and everyone can access an exchange's real-time data through APIs. You don't even need to create algorithms from scratch to connect with an exchange's server and fetch real-time data.
Of course, we are not here to talk about that today, as planned, we will introduce you to the different types of arbitration and how to apply them.
Because of all the features, flexibilities, and innovations that came with cryptocurrencies, there are a lot of opportunities in this market. Under these strategies, you will find different ways of capturing riskless profits in the cryptocurrency market.
Pure Spot Arbitrage
In this type, you buy a cryptocurrency from one exchange and then sell it in another one at a higher price.
You can see in these images, the difference in the real-time price of bitcoin between two different exchanges.
For example, assume you capture the above arbitrage opportunity, and after a short period, below arbitrage opportunity also occurred.
Now, let's move on to the second strategy.
This type of arbitrage has the same logic as pure spot arbitrage but this time there is no exchange of ownership of the fiat currency and cryptocurrency on the exchanges.
Instead, you capture the arbitrage opportunities by opening positions on the exchanges and then realize the profit by closing the positions once the prices converge to the same price level.
Assume the first arbitrage opportunity, where we buy on the left side, appeared in the futures market of Bitcoin. In this case, instead of buying at the exchange on the left, you open a position by going long, and instead of selling at the other exchange, you open another position at that exchange by going short.
Now you know how crypto arbitrage works, and how to put it into practice.
Sometimes you may not be fast enough to seize opportunities, or you still don't know how to do it. That's why arbitrage bots exist. They do everything for you. All you have to do is invest the amount of money you want, and let it do everything for you. Some bots manage to make a profit of over 20% per week.
We recently made a video to introduce you to the best crypto arbitrage bots. If you need us to do a review on each of these bots, let us know in the comments and we'll do it for you.
And if you need more details about crypto arbitrage, we have done a video about it. The link is in the description.
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