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How To Earn On Cryptocurrency Arbitrage

19:45 27/10/2018

In the previous article, we considered the simplest arbitrage scheme available to any novice trader. Now you know how to earn on cryptocurrency arbitrage. All you need is to have active accounts on two exchanges, know their trading and withdrawal conditions, and be quick.

 

Speed really plays a significant role in arbitrage trading. Today we will consider two more arbitrage schemes, in which it is also important not to waste time. The next cryptocurrency arbitrage strategy is simple and suitable for crypto beginners.

 

Classical Triangular arbitrage

 

This is a simple intra-arbitrage scheme that involves three crypto assets. To illustrate it, let’s take the following values for USD, BTC, ETH:

 

1 BTC = 6 000 USD

1 BTC = 32 ETH

1 ETH = 200 USD

 

What to do:

 

Buy 1 BTC for 6 000 USD

Buy 32 ATH for 1 BTC

Sell 32 ETH for 32*200 USD = 6,400 USD

 

As a result, you get more than you invested: 6 000 USD → 6 400 USD

 

The difference between the investment and the received amount is $400. You already know that this is not a profit. A trader first needs to pay a fee. Hypothetically, the amount of fees has to be lower than in the first example described in the previous article, because all transactions are performed on a single exchange. This means that you don't need to transfer funds between exchanges, pay fees, lose your time and a part of your profit. But there are some other points to remember if you want to find out how to earn on cryptocurrency arbitrage.

 

The majority of crypto exchanges work with fiat currencies — at least with USD. But there are also platforms that do not support fiat payments. This means that you need to deposit a cryptocurrency (BTC, ETH, XRP, or other coins) in accordance with the conditions of the exchange. After that you can buy a necessary cryptocurrency for arbitrage.

 

For example, you deposit bitcoins on an exchange and see an excellent opportunity for arbitrage with ETH, LTC, XRP. So, you need to sell BTC and buy another cryptocurrency. Thus, the chain of transactions increases, so does the amount of fees.

 

This is another important aspect: the amount of profit depends on the investment sum. Arbitrage trading in small amounts does not make any sense, you need to start with at least $1000. This applies to any arbitrage scheme, including the one that we are going to view below.

 

Inter-exchange arbitrage

 

This scheme is based on the difference in rates of the same currency pair on two exchanges. But it does not have the main drawback of the first scheme we considered. The trader does not need to quickly transfer funds from one exchange to another in order to complete the operation. In this scheme, funds are transferred between platforms only to equalize the balance, and this is not obligatory.

 

For example, let's look at the arbitrage between exchanges with bitcoin and another coin. We have an Exchange A and an Exchange B. A trader has the same amounts at both of them: 1 BTC and 20 ETH. The rates are different on the platforms:

 

Exchange A: ETH / BTC = 0.028

Exchange B: ETH / BTC = 0.036

 

The total balance is 2 BTC and 40 ETH

 

Any arbitrage is based on the idea to buy at a lower price and to sell at a higher price. This is the next step.

 

What to do:

 

Sell 20 ETH on Exchange B at 0.036 BTC

Then you get 1 BTC + 20 * 0.036 BTC = 1.72 BTC

The total balance on Exchange B is 0 ETH and 1.72 BTC.

 

Buy 20 ETH on Exchange A at 0,028 BTC

Then you get 1 BTC — 20 * 0.028 BTC = 0.44 BTC

The balance on Exchange A is 40 ETH and 0.44 BTC.

 

The total balance is 2.16 BTC and 40 ETH and the total profit sum is 0.16 BTC minus transaction fees.

 

It is worth remembering that this was just an example, there is no such a difference in rates on the real crypto market. However, even a slight discrepancy in cryptocurrency rates can be used for arbitrage, but no less than 2%.

 

A trader needs to equalize the balance on both accounts for the next arbitrage if s\he wants to continue. This means the transfer of 20 ETHs from Exchange A to Exchange B, and 0.72 BTC from Exchange B to Exchange A. The other way is to withdraw money to a crypto wallet.

 

In any case, the implementation of this arbitrage scheme requires simultaneous transactions on both exchanges. Naturally, it is impossible to conduct parallel trading manually. Next time we'll tell you what tools traders use to automate this process.

 
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