Do You Really Need to Use Arbitrage to Profit From Crypto?
Some traders are successful in arbitrage, but there are still too many uncertainties for it to be a truly practical method of making money. Let's explain why.
Despite (or rather because of) the inherent volatility of the crypto market, many traders have discovered an ingenious way to profit by engaging in crypto arbitrage. Can you do so too?
People in the crypto space (and, let’s be honest, everywhere else, too) are always looking for sure-fire tickets to make a buck quickly. Some argue that this is where crypto arbitrage comes in, as it allows traders to profit from price volatility across different exchanges relatively quickly.
The question is whether crypto arbitrage is a magic shovel for hitting a goldmine. TL;DR: Probably not. The long answer is—while it’s true that some traders are successful in arbitrage, there are still too many variables involved in the process for it to be a genuinely practical way to make money.
Still longer answer is below.
What Is Crypto Arbitrage?
Arbitrage is not a new phenomenon. It has long been a safe haven of traditional financial markets long before crypto. Yet, the crypto scene seems to attract arbitrageurs like a magnet. And for a few good reasons.
Firstly, crypto is renowned for its volatility compared to other markets, which makes profiting from price discrepancies easier. Secondly, crypto is available around the clock, offering more opportunities for traders to find profitable arbitrage deals.
Put simply, crypto arbitrage is a trading strategy where you buy an asset on one exchange and sell it on the other exchange to profit from a price difference between the two.
For example, suppose on Binance, one BTC costs $19,526, but on Gemini, it’s priced higher and costs $19,630. Because of the price discrepancy between these two exchanges, you can buy BTC on Binance, sell it on Gemini, and end up with a $104 profit. That works if you’re quick enough to buy and sell your bitcoin before the price changes.
However, sadly, other variables besides speed (think fees or liquidy issues) can be in the way.
How Does Crypto Arbitrage Work?
To benefit from price discrepancies, a trader like you need to spot the difference of an asset across two or more exchanges first and then execute a series of transactions.
To better understand how a crypto arbitrage works, let’s take a closer look at the types of arbitrage strategies.
Cross-exchange arbitrage is the already-mentioned, most common type of arbitrage—you buy an asset on one exchange and sell it on the other, thereby profiting from the asset’s price difference between the two exchanges.
Spatial arbitrage is similar to cross-exchange arbitrage, except that two or more exchanges are located in different regions. For example, you can profit from the difference in supply and demand of bitcoin between the US and Japan or the UK and Latin America.
Triangular arbitrage is a type of arbitrage that involves trading three or more assets on the same exchange to capitalize on their price discrepancies.
For example, you can make money from UNI/ETH exchange rate by buying UNI with USDT, then trading it for ETH, and finally selling ETH for profit. Suppose you buy 20 UNI for 6.5 USDT each and, thus, pay 120 USDT total. Then with your 20 UNI, you buy ETH at an exchange rate of 0.005, ending with 0.1 ETH. Finally, you sell ETH at 1,350 USDT, pocketing 135 USDT for a transaction and profiting by 15USDT overall.
This type of arbitrage involves profiting from price discrepancies between centralized and decentralized exchanges.
A decentralized exchange (DEX) is a P2P marketplace that facilitates transactions in a permissionless manner using Automated Market Maker (AMM) protocols. DEX examples are Uniswap, DOD, and Curve.
On the contrary, a centralized exchange (CEX) is run by a company in a centralized manner. CEX examples include Binance, Coinbase, and Gemini.
Statistical arbitrage typically involves a group of trading strategies best implemented using automated trading algorithms, which execute large volumes of high-frequency trades based on predefined rules.
Pros and Cons of Crypto Arbitrage
On the surface, arbitrage does seem to have multiple advantages. Risks are low, and you can always profit from the difference no matter where the price goes. Moreover, you don’t have to wait long to realize your profit—just open and close a position at the right opportunity.
However, some factors can significantly diminish your chances of a successful transaction or generating decent returns.
Since less risk tends to yield low profits, you’ll need to increase your trading volume to substantiate the required returns continuously.
Additionally, trading is not free, and trading on several exchanges is even more so. The fees (think withdrawal, deposit, and trading fees) eventually accumulate and start eating into your profits.
Consider our previous example with UNI/ETH. Let’s say that our total fees amounted to 1.5%. Then the transaction cost would be 120 USDT*0.015=1.8 USDT, which makes our final profit drop to 13.2 USDT.
To mitigate the risks of incurring exorbitant fees, arbitrageurs can limit their trading activities to exchanges that offer the lowest fees in the market.
Finally, arbitrage is time sensitive:
- As more traders spot arbitrage opportunities, the price disparity between exchanges evaporates.
- The time it takes to validate cross-exchange transactions on the blockchain can affect your trading strategy, as the market may easily move against you.
- There can always be delay risks associated with exchange procedures such as AML (and KYC) or even outages and hacks that can adversely impact your trades.
In summary, arbitrage is profitable for those who are the fastest to spot an inefficiency or discrepancy. And since the speed is at stake, traders obviously write bots to be quicker than others. In fact, there are already hundreds of bots out there making money from the ideas described above.
No wonder these tools are so popular—after all, bots can do what we do much faster, more frequently, and, let’s face it, far better.
Bitsgap doesn’t offer a сrypto arbitrage trading bot at the moment—we used to and maybe will in the future. But for now, we have several other options that can become powerful additions to your trading strategy.
Bitsgap Alternatives to Arbitrage
As mentioned, Bitsgap has several bots that follow different trading strategies – DCA, GRID, Scalper, and Combo.
The Flat bot, Buy the Dip, and Custom bots all follow the GRID trading strategy, which works by building a grid of orders above and below a set price, capitalizing on the sideways market and minor fluctuations in the price by buying low and selling high.
Both the Flat and Buy the Dip come with preset configurations that aim to capitalize on a particular market scenario. At the same time, the Custom bot can be tweaked to your specific preferences.
👉 Learn more about GRID bots here.
The DCA bot follows the Dollar-Cost-Averaging trading strategy that divides the investment across periodic purchases to get a better average entry price, thereby reducing the impact of volatility on your overall purchase.
You’d want to use the DCA bot to automate your daily trading routine while simultaneously bolstering your trading strategy with powerful technical signals and effective risk management tools.
👉 Learn more about the DCA bot here.
The Scalper Trading Bot from Bitsgap follows the scalping trading strategy and is designed explicitly for the KuCoin exchange.
Scalping essentially means profiting from minor price fluctuations, which in total, can amount to significant gains.
Bitsgap’s Scalper bot can execute over a thousand trades daily, which is impressive in itself, even more so when you think of how much profit it can generate over time.
👉 Learn more about the Scalper bot here.
The Combo Bot is an automated algorithm for trading futures on the Binance exchange designed to profit on both rising and falling markets.
As the name suggests, the Combo Bot combines different trading strategies to maximize returns. Thuswise, it uses the GRID strategy to profit from every market move and DCA to optimize the entry price.
👉 Learn more about the Combo bot here.
As competition grows and discrepancies between prices diminish, the popularity and viability of the arbitrage strategy decrease proportionately. That’s not said to discredit arbitrage or discourage you from trying it but rather to inform you about the inherent difficulties involved.
Bitsgap has fantastic alternatives that can be employed both in the spot and futures market, so it might be best to try those before seeking arbitrage bots elsewhere.
Also, we’re pretty sure once you try the Bitsgap bots, you’ll realize that you may just as well stick to them.
So what are you waiting for? Test the Bitsgap trading bots now!