What is crypto arbitrage? To understand arbitrage is first to understand the never-ending search for inefficient markets. Where there is inefficiency, there is potential for profit. In a fairly new market such as crypto, pricing between the many exchanges tend to vary and change at different rates. When different prices for the same asset exist across multiple exchanges, the arbitrage strategy is in play.
It’s possible to leverage prices to your advantage across multiple exchanges or asset pricing within the same exchange between different assets. Arbitrage is the process of exploiting inefficiencies in markets. There are simple arbitrage strategies and much more complex ways to profit from dislocation in markets. There’s also amazing software widely available to automate the entire process.
The First Arbitrage
Arbitrage is from a Latin word, “arbitrari,” meaning “to consider, judge, or decide.” A derivative of “onlooker, or Arbiter.” The French popularized the term arbitrage, and later it became synonymous with securities markets and finance.
There’s evidence of the first complex arbitrage systems around the time when the Code of Hammurabi was written in 1760 BC. Merchants solved difficult problems of selling goods in one location and receiving payment at a future agreed-upon date. Transportation of goods from one location to another was critical to survival, as were eventual receipts of payment.
A network of agents was needed to deliver goods and disperse funds across oftentimes wide geographic areas. The “arbitrageur” was responsible for assisting both buyers and sellers by offering risk mitigation in the transport of goods and the payments that followed. The price of certain goods was increased or decreased to compensate for the arbitrageur’s risks.
Endless Combinations of Crypto Arbitrage
The cryptocurrency market has many characteristics that make arbitrage potentially profitable. In fact, there are almost endless possibilities for crypto arbitrage at the moment. An estimated 504 cryptocurrency exchanges exist, and there’s reason to believe this number will only increase.
Along with these 504 crypto exchanges, there is over 2,000 cryptocurrencies trading among them. This nearly endless combination of related assets on different exchanges presents an enormous opportunity for the arbitrage hunters to search for their prey and exploit market mismatches and significant price differences.
Crypto Arbitrage in Practice
To identify a crypto arbitrage opportunity, you would first start by identifying an overlap in pricing between the highest bid market price and the lowest ask price. If you find an asset with a higher bid price on one exchange than the asking price on a different crypto exchange, then arbitrage is possible.
Crypto Arbitrage Software and Services
Looking for cryptocurrency arbitrage opportunities among 2,000 crypto assets trading on over 500 different exchanges is almost unthinkable without a simple and defined process. Actually, executing crypto arbitrage trades would be nearly impossible without the help of powerful software and dedicated services designed just for this strategy.
Recently, there’s been a proliferation of new services and apps tailored to assist crypto traders and investors in arbitrage execution. Not only do they execute trades, but they offer a variety of strategies and research to keep traders on the cutting edge of the world of crypto arbitrage and the real time, fast-moving crypto market.
Cryptohopper is an automated crypto trading platform with features designed to execute arbitrage fast and efficiently over various strategies. They offer triangular arbitrage between pairs of assets on a single exchange or multiple pairs on multiple exchanges.
One of the best features of Cryptohopper is the ability to execute arbitrage without sending funds from one exchange to another. Something that would be very difficult without the help of a service such as Cryptohopper.
How is this possible? How do you arbitrage crypto between two exchanges without sending funds? You simply need to own the coins for which you would like to arbitrage first. Then instant, simple execution is possible when an arbitrage opportunity presents itself.
ArbiSmart is a crypto trading platform dedicated to seeking out arbitrage opportunities. An important differentiation that ArbiSmart features are that it’s fully EU licensed and regulated. Meaning it has certain requirements for adequate operational capital, data protection and security, and mandatory audits. ArbiSmart can help spot market inefficiencies and price discrepancies across different markets.
There’s a variety of different platforms charging various transaction fees depending on the type of trading you are attempting, so be sure to do plenty of your own research before selecting a platform. At the time of writing, the different cryptocurrencies and the exchange rate difference can make potential profits exciting. But beware of trading fees eating into your gains.
Coygo is another cryptocurrency trading platform featuring arbitrage systems. The crypto world is full of security risks, and Coygo wants to be sure customers feel secure by never storing encrypted API keys and account credentials on the platform servers. All account credentials remain stored on your computer’s hard drive.
The Coygo terminal features an app to go along with their trading terminal for constant tracking of your portfolio and trading strategy with real-time charts and data tools.
MultiTrader.io is a crypto arbitrage trading platform that monitors 21 different cryptocurrency exchanges, constantly searching for arbitrage possibilities. The platform boasts powerful searching functions across many exchanges using statistical methods to predict possible arbitrage trading scenarios.
It’s fully automated and in real-time, allowing an unlimited number of cryptocurrency arbitrage bots to each search for different arbitrage strategies, reacting in milliseconds. MultiTrader also offers back-testing simulation so you can explore millions of different scenarios based on your desired trade parameters and historical data.
The platform outlines three distinct crypto arbitrage opportunities. First, the ‘Loop’ strategy relies on simple price differentiation between two exchanges. Next is the ‘Oscillator,’ where the trade will switch between two exchanges as one exchange price “catches-up” with the other, then reverses.
And finally, ‘Red Phoenix,’ where phase one includes prices on two exchanges distant from each other. Then, phase two, where those prices close the gap. The intricacies of this final strategy deserve their own dedicated explanation, so read the complete details here.
Empirica offers an interesting cryptocurrency arbitrage software product. The company specializes in creating institutional-grade trading bots allowing hedge funds and other market participants different ways to gain an edge.
Their proprietary crypto arbitrage bots execute orders in under one millisecond. Empirica specializes in cross-exchange arbitrage and triangular arbitrage. You have the ability to reach different countries, cross-border arbitrage, larger exchanges, and smaller exchanges with the Empirica software.
You can even build your own arbitrage bot through Empirica’s team of experts. There are many products offering arbitrage bots in the crypto space, but Empirica has been involved in crypto arbitrage work for over ten years. Bitcoin arbitrage, Ethereum, Litecoin, and many other altcoins are accessed through Empirica.
Bitcoin Beyond The Bubble
Cryptocurrencies and bitcoin are some of the fastest-changing technology in the world today. Investors and traders will constantly search for ways to profit from the technology itself and inefficiencies in the overall crypto market. Bubbles will form and eventually be popped. But the strongest assets will rise back up again.
The price of Bitcoin has increased rapidly over the last year, and arbitrage traders and hedge funds are looking to cash in on the increased trading volume. Crypto trading bots are constantly looking to take advantage of price differences, 24 hours a day, 7 days a week.
You may be skeptical of Bitcoin and the crypto asset class in general, but I would advise you to, at the very least, keep an ear to the ground. With all the flaws and deficiencies in today’s economies and capital markets, it’s very possible crypto might end up being one of the best bets.