What is crypto arbitrage & how to make the most of it?
Cryptocurrency arbitrage is a popular way to make money in digital asset markets.
By Manny Reimi
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You may have heard the word before when researching earning opportunities in Crypto. So, what exactly is arbitrage? Arbitrage occurs whenever an asset is sold in different markets at different prices, and an opportunity for quick profits from "buy low, sell high" presents itself momentarily. Arbitrage opportunities are common in Crypto because digital assets tend to be listed across multiple markets.
In this article, we will explore the legality of crypto arbitrage trading, the process to earn by arbitraging in crypto markets, and instructions on how to use arbitrage bots including a list of the most popular crypto arbitrage bots in 2020.
Is crypto arbitrage legal?
Arbitrage is completely legal, across all markets, not only in Crypto but across other asset categories. In fact, arbitrage is a natural economic phenomenon that allows for competitive pricing to be offered for the same good in different markets. Traders who engage in arbitrage are called arbitrageurs by economists and market analysts alike. In sophisticated markets, arbitrage is a form of risk-free trade, as the buy and sell operations will occur near-simultaneously, a good arbitrage will make quick, safe profits. Arbitrage also tends to be short-lived as arbitrageurs (or their trading bots) exploit the opportunity until it disappears. You will see arbitrage in all sorts of goods and asset classes, from commodities like gold to stocks to financial instruments like prediction contracts (bets) for sporting and political events. There is even arbitrage in college textbooks. Arbitrage will continue to be a feature of markets as long as there are market inefficiencies, and arbitrage will continue to be viewed favorably by academics and policymakers alike as arbitrageurs actually correct these inefficiencies as they arbitrage.
In Crypto, arbitrage has been there since the very beginning and continues to play an important role. Although it is much more diverse now, crypto markets started as dispersed commodity markets with Bitcoin going international very quickly. Restrictions in certain markets provided notable differences in pricing, with the famous Korean kimchi premium being a prime example: Korean buyers had to pay as much as 40% more for every bitcoin as U.S. buyers did during the height of the cryptocurrency boom of 2017. With Korea being the third-largest Bitcoin market, such inefficiencies have propelled crypto arbitrage trading as a major form of trading in cryptocurrency. One notable surge in popularity occurred during the bear market of 2018–2020 ("Crypto winter"), as arbitrage is bull-bear agnostic, an arbitrageur makes money whether markets are in full swing up or down.
Please note that although arbitrage is legal everywhere, cryptocurrency trading or holding may be illegal in many places. If the reason for a high price premium is the illegality of crypto activity in a certain market, you may be breaking the law by trying to conduct arbitrage (or any other commercial activity that's legal elsewhere) on that market.
How to make money on arbitrage with crypto?
Here is a step by step guide on how to make money on arbitrage with cryptocurrencies:
- Monitor the market. First, you must find opportunities for crypto trading arbitrage. You may find these by monitoring a cryptoasset like $ BTC, $ ETH, or $ XRP that are traded against many pairs and in a wide variety of markets, and check the different exchanges for a pair of your choosing (e.g. $ BTC /$USD) for simple arbitrage*. You could also check in the same exchange, where arbitrage opportunities will occur between different pairs in real terms i.e. *triangular arbitrage.
- Position the buy and estimate profitability. You will need to consider your transaction costs and other fees before you determine whether this arbitrage opportunity makes sense. If the market is volatile and transactions are slow, then the opportunity might be lost by the time your trade goes through. In reality, arbitrageurs prepare by being well-positioned with funded accounts in many cryptocurrency exchanges to be able to move fast in reaction to all kinds of profitable opportunities. This works by, for example, splitting 1 $BTC among two exchanges, and buying in one and selling on the other simultaneously.
- Execute the arbitrage by exiting the trade. Crypto arbitrage trading operations should be simple as to be executed simply e.g. you have bought $BTC in Coinbase Pro with $USD to sell it in Bithumb in $KRW , you would need to convert back from $KRW to $USD to fully exit the trade, realize your new position, and make a final estimate of your costs. Don't forget that, if you live in a jurisdiction that taxes investments or trading activity, you need to keep an account of any profits and losses incurred through arbitrage.
While these things may seem simple to an experienced trader, the biggest hurdle for a retail investor may be finding worthwhile opportunities. There are tools to help, for example, cryptocurrency exchange Bitbns has made a free browser extension to notify crypto traders of any potential arbitrage opportunities. The extension tracks activity in a few major cryptocurrency exchanges lists opportunities by volume and includes an estimate of the time to complete the arbitrage. You may also trade directly on the extension.
Even with such monitoring tools, it is important to know you will be competing for opportunities with other arbitrageurs, including sophisticated trading funds aided by trading bots. Given this landscape, a good option for many retail investors is to use a crypto arbitrage bot.
How to use a crypto arbitrage bot?
Crypto arbitrage bots are offered as a service by makers of algorithmic and trading bots. Bots are software programs that mimic tasks, often tasks that humans otherwise have to manually do. The idea of these bots rests on the assumption that arbitrage strategies result in a loop of processes or task lists to execute trades that would benefit from automation. Moreover, since cryptocurrency markets are open 24/7, a piece of software running around-the-clock to be better fit-for-purpose, particularly for an individual investor that needs to dedicate time to other priorities (including sleep). If developed correctly, such bots would also be able to process large amounts of data more efficiently and effectively than humans. Of course, bots have no hunches, and only process whatever interpretation(s) of the market they were programmed for. Bots also cannot understand the significance of emergent technologies or detect catastrophic threats. Also, remember that market movements often happen on sentiment – i.e. news, announcements, or even well-timed tweet by an influencer – and most bots out there rely on price, volume, and other market data to make decisions. Of course, trading bots — with the help of data mining, natural language processing, and machine learning — keep getting better at using sentiment data to complement their strategies, but as with any technology, there are inherent limitations.
So, should budding arbitrageurs like yourself consider using such bots? The reality is that in Crypto as in other markets like forex, equities, and commodities, most sophisticated arbitrageurs use bots as a tool to aid them in staying on top of the market. Outside of arbitrage, other traders also use bots or algorithms to harness the advantages in speed and data processing that computers have over humans. Keep in mind that no trading bot is immune to downtime, bugs, and calibration or logic errors on their code.
Remember, if you choose to go for using a bot in your journey as a crypto arbitrageur, find a reputable provider, preferably one that's been up and running for some time. Besides faulty bots, a few scammers out there have used the promise of a great bot as a lure to collect money that will be outright stolen. None of this is financial advice, so please do your own research and proceed with caution.
The best crypto arbitrage bots in 2020
These are the most reputable providers of crypto arbitrage bots nowadays:
- Cryptohopper. An advanced cloud-based platform with copy-trade features, Cryptohopper supports crypto arbitrage trading as well as other strategies like market-making and auto-trading. Strategy design and backtesting tools are also available on the platform. Pricing starts at $19/mth, but for simple arbitrage, you will need to upgrade to $49/mth and for both simple and triangular arbitrage to $99/mth. These advanced plans include a lot more functionality than arbitrage.
- 3Commas. A well-respected provider with lots of well-written Trustpilot reviews, the 3Commas platform offers a trading terminal integrated with trailing take-profit and stop-loss functionality, as well as step-selling. To use the arbitrage bot you will need to go Pro for $24.5/mth, but you will get a lot more functionality (options bot, automated dollar-cost-averaging, long and short algorithms – to name a few) for your money.
- HaasOnline (aka HaasBot). One of the most advanced tools to develop, backtest, and deploy arbitrage bots or other types of crypto trading bots. Available now as a trade server or as a cloud instance. One of HaasOnline's great advantages is the number of supported exchanges, over 22, including Binance, Kraken , Bitfinex, Bitstamp, and FTX . Plans start at ₿0.047/year ($612 /year at the time of writing).
- Well-known in the community for portfolio management, Shrimpy also offers social and automated trading, as well as portfolio rebalancing tools and backtesting tools to run strategies by. A really helpful blog and lots of scripts for crypto arbitrage trading through their API are the cherries on the top. Pricing starts at $13/mth.
Also, check out these free crypto arbitrage bots (on GitHub):
- Blackbird – a bitcoin-exclusive arbitrage bot.
- Catalyst Enigma – a customizable Python bot with a supporting dashboard.
- ZenBot – an open-source platform with a number of premade strategies, supporting several exchanges.
In summary, crypto arbitrage trading is a healthy part of crypto markets, perfectly legal, and executable between exchanges and within an exchange's multiple trading pairs. This type of trading was one of the first significant strategies in the early days of Crypto. Nowadays, crypto arbitrage bots are one of the most popular ways to practice this strategy in crypto, which will continue to evolve and mature together with the market as a whole.