Getting Started with Crypto Arbitrage

by Adam Tracey

Arbitrage is something that isn't exclusive to cryptocurrency markets, but due to the volatility typically found in cryptocurrencies makes it a very popular way to make money with the help of crypto exchanges like LocalCoinSwap. There's a range of ways people look for arbitrage opportunities, let's explore a few of them and find out why so many traders seem to be interested in arbitraging cryptocurrencies on exchanges all over the world.

Is Arbitrage Profitable?

Arbitrage trading is popular both in traditional markets as well as cryptocurrency for good reason. Considering the volatile nature of crypto, arbitrage can be even more effective at times with this new growing asset class. Even large cryptocurrencies like bitcoin still provide frequent openings for traders to exploit across the various markets now trading these larger more established cryptocurrencies.

Crypto arbitrage is here to stay, and one of the most profitable approaches to using arbitrage to trade crypto for profit is to explore the broad potential that is opened up in the peer-to-peer (P2P) markets across the world.

The Markets & Traders Aren't Predictable

Before we delve into crypto arbitrage, it's worth understanding why it occurs in the first place. The main reason arbitrage opportunities are frequent in cryptocurrency is that the markets aren't perfect, and the behavior of traders is never the same universally. Everything from regional changes, such as changes in crypto regulations in a specific region to wallet maintenance on certain exchanges can result in the potential to make money using crypto arbitrage. Nonetheless, like the markets, there is no arbitrage opportunity that is perfect either.

Some Types of Crypto Arbitrage:

  • Simple arbitrage - exploiting small price differences between exchanges
  • Cross border - selling between regions with price differences
  • Payment type premiums - some payment types are rarer and more profitable to accept or receive allowing for potential gains
  • Volume volatility - lower volume exchanges can have more price volatility that can be profitable though typically higher risk
  • Margin arbitrage - buying a coin on one exchange while shorting the coin on another where you believe it is under market price
  • Simultaneous Purchase and Sale - arbitrage different cryptocurrency exchange pairs by buying on one and selling the same asset on different exchanges at the same time exploiting the price difference on the same pair. Different order books can have quite different prices on two different exchanges at the same time.

How to Arbitrage While Keeping Things Simple

One of the easiest ways to make a gains from arbitrage trading is to look at price differences between different cryptocurrency exchanges. If the gap is wide enough and volume or other factors like platform maintenance aren't likely the cause, you can often take advantage of this price difference. The most significant risk you face is if you are moving funds between two exchanges is that the time it takes could result in you losing out on the trade.

If the price spread between one exchange to another is suspiciously high, try and work out why, if there is withdrawal delays or some other factors at play you are unlikely to be able to take advantage of it. Ensure you research exchanges you plan to add to your arbitrage list, you don't want to only find out when you have a problem that an exchange has a history of poor support, there are plenty of exchanges to look at for arbitrage potential so avoid settling for anything you don't feel comfortable using.

How to Arbitrage and Make Profits Consistently

One of the best ways to make money from crypto arbitrage trading, at least in our opinion, is to do so with P2P exchange, especially when working with BTC, ETH, or other established cryptocurrencies. While some payment types can be more advanced to trade with and require a bit of research you may find that there are payment types available to you that allow you to make money from the convenience of offering it to other traders.

A lot of people look to buy small amounts of bitcoin with PayPal, and while this can be a riskier payment method to accept, it does demand a premium. If you select your trade partners well and manage your risk, you could potentially be able to profit from this payment type premium. Selling crypto for gift cards is another higher-margin payment type, but there are many more payment types that provide a decent profit margin for P2P traders.

To minimize your risk when exploiting payment type arbitrage opportunities try and focus more on reasonable profit margins mixed with higher volume, this will likely reduce dealing with complicated payment methods while still allowing you to earn money from arbitrage trading.

Cryptocurrency Arbitrage Apps & Tools

You'll find an abundance of tools for arbitrage trading online, like anything ensure that you trust the sources from which you are downloading tools to arbitrage bitcoin and other cryptocurrencies. You can find things like crypto arbitrage calculators and much more out there with just a quick web search.

Beware of exposing your crypto exchange API keys to platforms you don't trust, and even if you do beware of things that have happened in the past. Even if your API key doesn't allow withdrawal it doesn't mean it can't be used maliciously, a group of API keys could all be used at once to buy the same low volume cryptocurrency, in turn, pumping the price for those in control of the APIs to profit from resulting in you losing out. There are still however many free arbitrage tools you can find that you won't have to expose account access or APIs to, these require more work from you but do remove some of the risks of arbitrage trading using third-party apps and tools such as arbitrage bots.

What are the Risks of Arbitrage Trading?

  • Withdrawal fees eating into your potential margin
  • Other arbitrage traders closing the gap before you
  • Slow transactions can result in your missing out
  • Storing coins on exchanges to act fast on arbitrage opportunities
  • Some exchanges are limited to users with a local bank account
  • Sudden price movements can be common with cryptocurrency arbitrage

Automated Arbitrage

There's a range of approaches to automated arbitrage, however in the past some of the platforms that offer automation of arbitrage or trading bots have been exploited resulting in strange market behavior that can result in your losing money. When it comes to P2P trading some vendors have custom software developed to help them streamline their trade flow, but for most people using P2P exchanges to arbitrage the manual option is just fine thanks to the larger margins that can often be achieved.

Automated arbitrage is more common when it comes to centralized exchanges, but as previously mentioned anything that has access to your funds, even if it can't withdraw them, can be exploited and is something of a risk. Handing over you API key to software you don't trust is just as dangerous and handing over your login information or private keys to your wallets. Staying in control when performing cryptocurrency arbitrage ensure you can focus more on your trades and less on worrying about the security of the arbitrage bots or other arbitrage software you are using, not to mention the subscriptions or outright costs can be quite high for many of these automated arbitrage tools.

The Best Tools for Arbitrage Traders

You can also use CoinGecko, Nomics, CoinMarketCap, and similar websites that list crypto market data to look for price variations between different exchange listings. If you just want to keep an eye out for arbitrage opportunity that may affect coins you hold already, this can be a fundamental way to take advantage and increase your crypto holdings. As always though, profit is never guaranteed even with higher volume coins like BTC, and you can also come out with a loss from crypto arbitrage trades so don't expect to win them all and make sure you understand the potential risks.

One of the best tools for arbitrage can be a simple to use crypto portfolio tracker like Delta, Blockfolio, or CoinStats. With these you can check the price of crypto pairs across a range of different exchanges allowing you to look for higher price market pairs to buy and sell against.

What is Triangular Arbitrage?

If you've been learning a little about arbitrage already, you may have stumbled on this term here and there. Triangular arbitrage is a more advanced type of arbitrage that can be used by cryptocurrency traders that takes advantage of the multiple pairs often available on the same crypto exchange for the same digital assets. In some cases, you could find a coin or token listed on a cryptocurrency exchange that has more than a single base pair, for example, BTC/USD and BTC/EUR trading pairs. Using this form of bitcoin arbitrage (or for other cryptocurrencies) allows you to bypass the issues that you face when dealing with different exchanges at once and instead will enable you to arbitrage between different crypto markets on the same platform.

Sometimes you might find there are differences in the prices of the various pairs that are available to you which can be an arbitrage opportunity that only requires you to use one exchange. For example, you may notice the Euro pair for BTC currently trades higher than the USD pair on the same exchange; here you may want to buy bitcoin with USD then sell it for Euro. If you're going to switch back quickly you could then buy something like ETH/EUR and then sell it for ETH/USD if they are more in line with the market average to get your value back in the form you had (ideally with some profit as well if your math and the prices worked out in your favor).

Triangular arbitrage as you can probably tell is a little more complicated, but it does avoid having to deal with transaction times, so an excellent triangular arbitrage opportunity can be worth investigating. The most important thing to remember when looking at opportunities for triangular arbitrage is that you will likely have to take into account fees for each step of the transaction to make sure you are likely to have a profitable crypto arbitrage trade at the end resulting in some gains in your exchange account.

Using Peer-to-Peer Trading Across Borders

As was mentioned earlier, using P2P trading exchanges like LocalCoinSwap to offer different payment types can provide a consistent way to arbitrage the difference in demand between payment types. Yet, you can also take this in a different direction and apply P2P trading to arbitrate crypto between different locations as well.

Many regions deal with unstable governments, regulations, and availability of access to cryptocurrency resulting in crypto prices that can be quite different to the market prices in other regions. While often this can be difficult to overcome if you are inside these areas, you could be able to assist with providing access to cryptocurrency, as well as make some profit with crypto arbitrage. If you notice a region that has a high demand for crypto that isn't currently being met and traders are commonly looking to trade with a payment type you have access to you may be able to exploit this gap to arbitrage cryptocurrency using P2P exchanges.

P2P exchange brings the world market together when it comes to cryptocurrency and allows more people access than any other type of exchange type. At LocalCoinSwap, you can trade inside and outside your community with a range of cryptocurrencies, an even more vast range of payment methods. With P2P exchange with the ability to set your terms and prices to suit you.

Arbitrage trading is a popular way many people choose to make their cryptocurrency trading more profitable. It can be more predictable than speculative trading when done with care, and although you are never guaranteed a profit, it can be a consistent way to make money trading bitcoin or other popular cryptocurrencies.

The issue you may face when it comes to the law and legality of arbitrage trading crypto is less to do with arbitrage itself and typically more to do with the current laws surrounding whether you can buy or sell cryptocurrency in your region. The laws associated with cryptocurrency are seemingly ever evolving and can vary significantly between different countries or even states. If you are in doubt always check your local laws and be sure you understand what is required of you when trading cryptocurrencies in your region.

So is arbitrage illegal? Generally no, but you may find the use or trade of cryptocurrencies is restricted where you live. From the United States to Kenya or even Venezuela cryptocurrency is treated differently by regulators, so this is an important factor to consider before deciding to begin trading bitcoin arbitrage, or any other crypto for that matter.

How Bitcoin Arbitrage Works on LocalCoinSwap

Register an account if you haven't already and start exploring the thousands of trade offers waiting for you. Start buying and selling bitcoin between more in-demand payment services, regions with unmet demand, and even between LocalCoinSwap and other cryptocurrency exchange platforms. With a huge range of payment methods at your disposal and traders across the world waiting for you to initiate a trade, you can arbitrage bitcoin with various different methods all while making a profit and providing better access to cryptocurrency to others!

Get started taking advantage of crypto arbitrage opportunities today and start looking for opportunities to make a profit, something you can do with even a single exchange when it comes to P2P trading. Using LocalCoinSwap you can start providing crypto to more traders or start a trading business for yourself leveraging the various opportunities and types of arbitrage possible on P2P exchanges.

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