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How Crypto Arbitrage Works – Can You Make Money With It?

How Crypto Arbitrage Works - Can You Make Money With It
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Have you noticed the price of cryptocurrency on different exchanges can vary? 

For instance, you might see the bitcoin on Coinbase for $48,000 while it might only cost $47,000 on Binance.

That difference is due to an inefficient market. And some users have figured out a way to make money by selling cryptocurrencies between exchanges when they are priced differently. 

That is called arbitrage – buying a product for less and selling it for more. Crypto arbitrage refers to buying cryptocurrency on an exchange and then selling it for more on a different exchange.

Now, a newcomer to cryptocurrency will see a difference of 10% between two exchanges and view that as free money. Buy, transfer, and sell for a 10% profit. Is it really that easy?

Not quite.

Anyway, this article will cover everything you need to know about cryptocurrency arbitrage. Can you make money with cryptocurrency arbitrage? Why do different crypto exchanges have different prices for the same cryptocurrency? 

We will even cover how you can make money with crypto arbitrage. We’ll warn you, it’s much more difficult and risky than you probably thought when you first saw the price difference between exchanges.

Why Different Crypto Exchanges Have Different Prices

As mentioned previously, you may have noticed that different cryptocurrency exchanges have different prices for the same cryptocurrency.

Strange, right?

This is actually a common occurrence in something called an inefficient market. The reason for this in cryptocurrency is varied. Some reasons include the following:

  • Exchanges hiding fees by charging more for cryptocurrency.
  • Whales buying or selling a large amount of cryptocurrency on a particular exchange.
  • Low volume on an exchange causing the price to not update.

Remember, cryptocurrency is still relatively new and not tightly regulated, so a lot of these inefficiencies can occur on exchanges. 

Do People Arbitrage Cryptocurrency Between Exchanges?

Yes, people arbitrage cryptocurrency between exchanges. However, these people are usually running bots that constantly scan exchanges for arbitrage opportunities. 

You can do arbitrage manually, but it requires constantly scanning cryptocurrency exchanges looking for an opportunity. It’s simply more profitable to run an automated bot. Especially because the bot can perform a large volume of marginally profitable trades in a short amount of time.

Those small profit trades eventually add up to a large gain.

For instance, a bot might see that bitcoin is priced at $45,000 on Binance and $48,000 on Coinbase Pro. The bot will then buy bitcoin on Binance, until the price rises to an unprofitable amount, and then sell it on Coinbase for $48,000.

That’s the thing with arbitrage – the profitable arbitrage opportunities do not last long because arbitrageurs will buy or sell that cryptocurrency until the price is equal with the other markets. And that’s why these arbitrage bots are scanning the cryptocurrency exchanges 24/7 looking for opportunities – they don’t occur as often as you probably think.

The Risks of Crypto Arbitrage

We know, you probably think crypto arbitrage is easy, risk-free money. 

Unfortunately, that is rarely ever the case. It’s certainly not the case with crypto arbitrage. There are many risks with crypto arbitrage, and these risks have cost arbateurs profit in the past. 

The following is an explanation of some common risks with crypto arbitrage. 

The Price Drops During Transfer

All cryptocurrencies, other than stablecoins, have a reputation for being volatile. The price can swing 10% in a matter of minutes with Bitcoin or Ethereum.

This can be a problem with arbitrage if, for instance, you purchase bitcoin on Exchange A and during your transfer to Exchange B the price drops.

That usually means that someone beat you to the arbitrage opportunity, but the reason does not really matter. All that matters is that you will lose money on that arbitrage opportunity. 

This occurs a lot when trying to do arbitrage. Again, it’s usually because someone (likely running an arbitrage bot) beat you to the arbitrage opportunity.

Your Cryptocurrency Transfer Fails

Another problem, albeit less common than the price dropping, is that the transfer fails. This could occur because of a problem with the exchange or not having enough satoshis on your transacti on. 

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We admit that this is not a particularly common problem, but it does occur on exchanges from time to time. Especially when an arbitrage opportunity opens up and other people are trying to do the same thing.

You Don’t Account For Fees

Finally, a rookie mistake with crypto arbitrage is not accounting for exchange fees. If you do your research, then you will not make this mistake. 

Unfortunately, a lot of beginner arbitrageurs do no research about fees. They simply see an opportunity and go for it. 

Sometimes they get lucky and the profit covers the fees, but normally it’s a recipe for an unprofitable trade. The arbitrageur will then learn the hard way the most common reason that exchanges have different prices – all the arbitrage opportunities have been used and the difference already accounts for the fees!

How to Arbitrage Crypto Between Exchanges

There are two popular ways to arbitrage crypto between exchanges. Both methods have positives and negatives. Here is a breakdown of the two methods:

Transfer Arbitrage

A common, albeit risky, method to arbitrage cryptocurrency is by transferring it between exchanges. 

As mentioned earlier, you buy it for a low price on Exchange A and then sell it for a higher price on Exchange B.

Pros

  • It’s easy to do.

Cons

  • Fees eat into profit.
  • Transfers can fail.
  • Transfer can be slow and you lose money.

Final Verdict

Transfering between two crypto exchanges is the most basic form of arbitrage because it’s easy, but it does have a lot of risk. The risk is mostly based on the transfer taking longer than anticipated and the arbitrage opportunity disappearing.

No Transfer Arbitrage

The less common form of arbitrage is no transfer arbitrage between two exchanges. It’s a bit more complex strategy, but the results are still the same. 

Basically, it works like this.

  1. Deposit cryptocurrency on Exchange A.
    1. Exchange A should typically have a higher price for cryptocurrency.
  2. Deposit fiat currency on Exchange B.
    1. Exchange B should typically have a lower price for cryptocurrency.
  3. Look for an arbitrage opportunity between the two.
    1. Remember, transfer fees are not an issue, but other buyer/seller fees still might occur.
  4. Buy cryptocurrency on Exchange B and sell the same cryptocurrency on Exchange A at the same time.

Pros

  • No transfer fees.

Cons

  • An order might not go through at the desired price.

Final Verdict

This is the method we recommend for crypto arbitrage. The risk is much lower because you remove one of the riskiest and most time consuming steps – the transfer between exchanges. It still has some risk of price slippage, which will cause you to get a worse price than you want. 

Still, the risk of this method is much less and it can be done for smaller amounts, so it’s usually a better method.

Can I Make Money With Crypto Arbitrage?

Yes, you can make money with crypto arbitrage. But it’s much more difficult and risky than it looks. In other words, you will probably not make money with crypto arbitrage long-term. The amount of risk that you must take to earn a 5% return is simply not worth it.

That said, if you see an arbitrage opportunity that is 30% or some other high number, then it might be worth investigating if it’s an actual arbitrage opportunity.

Final Thoughts

Well, that covers it for crypto arbitrage. It’s not too difficult to understand the mechanics of how it occurs and why it occurs. But it’s significantly more difficult to turn that knowledge into profit. 

All in all, we don’t really recommend using crypto arbitrage to make money unless you have a bot or are very familiar with the working of the crypto market. It’s simply too risky for the small amount of profit that you can earn.

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