Arbitrage is the ability to take advantage of price differences between marketplaces for profit. When the same product or financial asset is available at different prices, there are gains to be made. Investors looking to minimize risk are always on the lookout for arbitrage.
Risk-averse individuals that engage in arbitrage create tools and methods to track down potential opportunities. Known as arbers, these investors cherish the chance to make one or two percent on a transaction, over and over again.
However, the more volatile a marketplace, the greater the potential for bigger profits. According to experts of crypto arbitrage from SoFi, an example of this potential is illustrated in the following historical case:
Famously, in 2017 there was a moment when the price of Bitcoin on Kraken was $17,212, but only $16,979 on Bitstamp—presenting an arbitrage opportunity. In that instance, an investor could potentially make $233 per Bitcoin by buying them on Bitstamp and then quickly selling them on Kraken.
So, What Is Crypto Arbitrage?
Crypto arbitrage is the ability to simultaneously buy and sell a cryptocurrency on two different exchanges for profit. In a volatile space such as crypto, arbitrage opportunities can be more profitable than in other asset classes.
How Does Cryptocurrency Arbitrage Work?
Cryptocurrency arbitrage works by buying a cryptocurrency on one exchange and simultaneously selling it on a second exchange at a higher price. Beginners in crypto arbitrage need to have a good grasp of how the space works as there are several moving parts.
When trading, crypto investors often use stable coins to lock in their profits in a constantly changing environment. Stable coins are cryptocurrencies that have a set value, often set at one dollar. By using a stable coin, the investor ensures they don't have the rug pulled from under them.
For example, buying $10,000 of Bitcoin on one exchange and selling it for $10,500 on another will give a $500 profit with the use of a stable coin.
What Are the Types of Crypto Arbitrage?
There are two main types of crypto arbitrage that traders can employ. The first is the arbitrage that takes advantage of price differences between cryptocurrency exchanges.
The second type is called triangular arbitrage. It’s one that can occur on a single exchange. This method involves profiting from three different cryptocurrencies as they fluctuate on the exchange.
Is Cryptocurrency Arbitrage Profitable?
Cryptocurrency arbitrage is one of the more profitable types of financial arbitrage since price discrepancies between cryptos can be quite large. However, as with any other type of arbitrage, time windows do not remain open for long.
Investors that trade in the stock market are aware of the concept of stock float. This involves knowing the number of shares that are currently available for trading. With arbitrage, stock float is of the utmost importance depending on the size of the desired trade.
In crypto arbitrage, the trader needs to know that when executing the parallel trades that will yield a profit, that the amount of crypto is available for purchase at the target price.
In the example above, if the arber purchases $10,000 of BTC at $50,000 per coin, they need to be able to sell their BTC at $52,500 per coin for a $500 profit. How much BTC is available on the exchange at the $52,000 price point? If it's not enough to complete the arbitrage, the investor may end up with a loss.
Is Cryptocurrency Arbitrage Legal?
Yes, cryptocurrency arbitrage is legal. As long as an investor is permitted to purchase cryptocurrencies where they live, they can engage in arbitrage.
Pros of Crypto Arbitrage
The biggest pro of crypto arbitrage is that it involves minimal risk. With hundreds of crypto exchanges and thousands of cryptocurrencies available, the opportunities are virtually endless.
Cons of Crypto Arbitrage
While the concept of arbitrage implies zero risk, obstacles such as slippage and fluctuating transfer fees can eat away at profit or even turn a loss if arbers aren't careful. Also, there is increasing competition in the arbitrage space as more investors are looking to profit.
Important Things To Know Before Trying It
Before trying arbitrage, it's important to have a solid understanding of how cryptocurrency trading works. It's also essential that arbers have the necessary tools in order to find and execute arbs quickly and efficiently.
Trusting a reliable expert such as SoFi can help investors overcome the learning curve and make their experience a more profitable journey.