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In this guide, we’ll talk about what crypto arbitrage is, how it works and highlight the pros/cons.
Have you been trading cryptocurrencies and noticed an amazing opportunity for instant profit? Yes. We’ve all been there, but is it too good to be true?
Key points about Crypto Arbitrage
- Only use trusted exchanges
- Make sure your exchange withdrawal/deposit limits are high enough and open for your trade
- Ensure there is enough liquidity
- Good crypto arbitrage opportunities are rare
What is Crypto Arbitrage?
To put it simply, crypto arbitrage is the act of buying a cryptocurrency on one exchange and selling it for a premium on another, profiting from the difference in price between the two exchanges.
How does Crypto Arbitrage work?
There are many steps you have to take before getting started with crypto arbitrage, these preliminary steps are vital to minimise risk and ascertain wether it is worth it.
Step 1: Find the exact percentage increase between the lowest bid onexchange 1 and the highest ask onexchange 2 of the asset you are looking to perform arbitrage onusing the following calculation: (percentage increase = [(new value – original value)/original value] *100).
Step 2: Work out the maximum amount available you can sell of the asset in mention on exchange 2, this determines the total amount of money you can profit on.
Step 3: Check whether withdrawals for the asset are available on exchange 1 and deposits are available on exchange 2, this will determine whether you can perform the trade.
Step 4: Work out the total fees incurred by performing the arbitrage and take this amount away from your exact % increase from your calculation above, this will help you decide whether or not it is worth making the trade. Fees to look for are trading fees, withdrawal fees from exchange 1 and any deposit fees on exchange 2 (rare).
Step 5: Asses market volatility. If the market in question is having large swings, you may not be able to perform the trade as all profits could be wiped out before you get the chance to sell.
Performing Crypto Arbitrage
Now that you’ve assessed the risk and decided whether or not the trade is worth it, it’s time to get started (this is the fun part!).
Step 1: Buy the cryptocurrency on exchange 1
Step 2: Withdraw the cryptocurrency to exchange 2
Step 3: Sell the cryptocurrency on exchange 2
You’re all done! If you performed your calculations correctly, you should have profited nicely.
Is Crypto Arbitrage legal?
This is a tough one. It depends fully on your jurisdiction and current regulation. Although, we do know that it is commonly accepted with open arms as it provides different markets with liquidity and decreases spread, increasing market efficiency. Nevertheless, here’s some things you should take into account.
- Taxation – income, capital gains or excluded?
- Exchange regulation – are you allowed to be trading on these exchanges in your geo-location?
The pros & cons of Crypto Arbitrage
- Instant profit
- High potential to compound profits
- Low requirements to entry
- Good opportunities are rare
- High risk of losing profits due to the high volatility in the cryptocurrency markets
Crypto Arbitrage bots – are they a scam?
Due to the increasing popularity of crypto arbitrage, there are many companies popping up offering a bot (robot) that supposedly performs arbitrage for you on a regular basis giving you ‘guaranteed returns on your investment’.
There’s one question you should be asking yourself: ‘if this bot really works as well as they say it does, why are they selling it? Surely they would just use it themselves as this magic money making machine would lose profitability the more it’s being used, correct?’.
That should answer this question for you, we believe that these bots are not as efficient as they claim to be and they are just another way of taking money from investors pockets.
Crypto Arbitrage – our conclusion
Being completely honest, crypto arbitrage is a rare thing and will most likely not make you rich quick.
On the other hand, there are occasionally good opportunities to make some quick money and when this happens, we alert members of the Blockduo trading room so that they can also benefit from it.