Cryptocurrency

June 9, 2020

Crypto Arbitrage Explained – Basic Guide About Arbitrage Strategies

All free markets are a business opportunity for those who are involved, since there are price variations when buying and / or selling certain assets. This “gap” between one price and another is the profit obtained after trading. Eventually, people will end up paying more (or less, depending on the market) for the same product and thus, a competition is born, just as happens in the Crypto market when currencies increase or decrease in price.

In the case of crypto exchange, all cryptocurrencies have price variations and it is necessary to analyze market patterns to determine what will happen next. However, not all exchange companies operate at the same rates, making speculation of digital assets possible and this is where Crypto Arbitrage starts.

What is Crypto Arbitrage?

Crypto Arbitrage is simply buying cryptocurrencies on one exchange (at a lower price) and selling them on another exchange at a higher price. This is possible since different exchanges generally have different prices for the same cryptocurrency. This price differential situation is used by traders to make a profit on their investments using arbitrage.

This process is possible due to the way in which the price of cryptocurrencies is calculated. Let us remember that their price is formed by the pressure between the demand and the supply of those who sell coins and those who want to buy them. A dynamic bid that little by little is driving the price down or up as the case may be. What ultimately allows this type of practice to be possible.

How does Crypto Arbitrage work?

The best way to explain how crypto arbitrage works is through a trading example:

Let’s say that a user of “X” Exchange invested $1000 in Bitcoin, which is valued in a specific exchange at 10,000 USD. This user will have obtained 0.10 BTC and if he wants to make profits, he will have to wait for the price of Bitcoin to increase. Our user is not sure if the market is about to enter an uptrend or bearish, so he starts looking for more immediate options to get a profit on his investment.

The trader realizes that on the exchange “Y” they sell Bitcoin at $10,200. This means that, on that platform, your 0.10 BTC is valued at $1,020, allowing you to get $20 of profit just by selling. Assuming that the commission for sending the tokens from one exchange to another is $3, it is not a bad business, since it still has a net profit of $17.

What factors may indicate an opportunity for Crypto Arbitrage?

Liquidity is essential for each exchange. There will always be opportunities for Crypto Arbitrage when the exchange platforms have a constant flow of incoming money, as it sets a good price for cryptocurrencies and mostly encourages the supply and demand process. Thus, an exchange that has a transaction volume of $10,000,000 USD per day (For example) will have better prices than one that moves only $2,000,000 USD.

On the other hand, exchanges have a diversity of users that make prices act specifically. For example, an exchange with a large number of institutional users will have a downward price differential compared to one with personal users.

In some countries, for example, users are also able to acquire or sell BTC and other cryptocurrencies for higher or lower prices due to specific market conditions. In Argentina, for example, users are buying BTC at a premium of around 80% if we take into consideration the official exchange rate. 

It is also necessary to analyze the countries where the exchange companies are based to explore opportunities with Crypto Arbitrage. Not all countries have the same demand for cryptocurrencies, there are even nations where digital assets are regulated and many users are willing to pay more for a cryptocurrency that they cannot easily obtain from their locality.

In countries with high demand for cryptocurrencies, the price will always keep moving and explore bullish areas, while in countries with low demand for cryptocurrencies, its price will be affected by what people are willing to pay to acquire said token.

Here, traders can find a perfect opportunity for crypto arbitrage only by buying a cheaper cryptocurrency in a country where it is not so highly priced and sell it in another where there is a high demand for it.

Is crypto arbitrage legal?

It is legal as long as buying cryptocurrencies is. Doing crypto arbitrage can be more complicated if you live in a country with strong restrictions on cryptocurrencies.

In case you live in a country where you are free to trade in any crypto market and different exchange companies, you can take advantage of the price variations that exist between them to get benefits.

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