Education By  Lev Peschykhin
Newbie 68935 2 Nov 2022

Crypto Arbitrage: Its features and disadvantages.

By  Lev Peschykhin 68935 2 Nov 2022
Photo - Crypto Arbitrage: Its features and disadvantages.

More and more people are seeking their own way of making money with cryptocurrency. Let's consider crypto arbitrage as one of the trading strategies.

We have already discussed some options for making money with crypto, you can read about them here. Today we'll expand our list with crypto arbitrage. This article will cover the concept of crypto arbitrage, its key aspects and its value in 2022.

What is crypto arbitrage?

Crypto arbitrage is a financial strategy of instant buying and selling crypto assets on different exchanges to gain profit from price differences. This strategy usually brings earning opportunities with sudden market price changes, resulting in rates on one exchange lagging behind the current rates on another exchange.

The key factor in arbitrage is speed. Usually, price gaps (price differences) on exchanges are closed in a few minutes. Arbitrage traders can make high profits only if they manage to buy and sell the asset within a tight timeframe. 

How does crypto arbitrage work?

The arbitrage strategy is not limited to the cryptocurrency market. This strategy can be used for any exchange-traded asset, including stocks, bonds, and fiat currencies. An example of how it works: A user buys one WBT token at $100 on exchange A. Then, the user finds that exchange B is willing to buy that token for $110. The user goes to exchange B, successfully sells his token, and retains $10.

Interesting fact: Arbitrage traders play a very important role in price leveling. They balance the supply level of an asset on different exchanges, thus helping to adjust the buy/sell price. 

As we have mentioned above, speed is a necessary component for successful arbitrage. To make money from arbitrage in 2022, you need to have access to real-time data from multiple exchanges at the same time. Keeping up with that manually is very difficult, that's why many arbitrage traders use specifically designed software. It allows the maximum speedy tracking of all transactions and rapid execution of buy and sell orders on various exchange platforms. This way, the trader gains the maximum advantage from the temporary price gap. 

What are the types of crypto arbitrage?

Arbitrage may initially seem a very simple and trivial tool: buying on one exchange and selling on another doesn't take much wits. But let's examine the basic types of arbitrage a little deeper:

Cross-exchange arbitrage: This is a "standard" type of arbitrage trading. With this strategy, the user buys a token on one exchange at a lower price and sells it at a higher price on another exchange. Cross-exchange arbitrage works for both CEX and DEX.

Triangular arbitrage: It involves buying and selling an asset on the same exchange, earning a profit from the price gap between different cryptocurrencies. For example, you buy BTC for USDT, then you buy ETH with BTC, and in the final step, you sell ETH for USDT.

Spatial arbitrage: This tactic is designed to capitalize on price gaps of the same asset across different regions. Arbitrage traders should consider foreign transaction fees and fiat currency conversion rates. 

Things to watch out for in crypto arbitrage

Trading fees: Each exchange collects a fee when you buy, sell, or convert crypto. Arbitrage traders must be aware of any additional charges.

Slippage risk: Slippage is a negative discrepancy between the expected price of a trade and the execution price of a trade. This phenomenon is common for small and illiquid exchanges or low-cap tokens. If the arbitrage trader fails to execute his trades quickly, he stands the risk that the arbitrage trade will not only fail to return him a profit but will possibly bring him a loss.

Sluggishness: A huge number of traders around the world are hunting for trade opportunities with the latest software. If a trader attempts to trade manually and is not fast enough, another trader is likely to take advantage of the price discrepancy first. 

Final words

Crypto arbitrage seems to be a great alternative for people who don't want to take much risk, especially in 2022 which has become the year of uncertainty. Despite some disadvantages, arbitrage is still a good money-making strategy. Even such giants as Uniswap or Sushiswap would hardly work as smoothly and quickly without the "counterbalancing force" represented by arbitrage traders.

Always do your own research, otherwise, even arbitrage can lead to significant losses!