What is Crypto Arbitrage Trading? Is it legal and can you make a profit from it?

In this guide, we provide an explanation on what is crypto arbitrage trading and is it possible to make a profit from it. 

Apart from mere definitions, we go through different crypto trading strategies for arbitrage that are applicable to cryptos. We also define benefits and, more importantly, risks in indulging with crypto arbitrage trading.

What is Arbitrage Trading?

Cryptocurrency arbitrage trading is looking for differences in prices to make a profit. These price differences occurs between different markets or different trading sites.

They are commonly referred to as “arbitrage spreads”, can be used to buy a cryptocurrency at a lower price on one trading site and then sell it at a higher price on another trading site.

Lets take an example:

  1. Alice buy 1 Bitcoin on Binance for $10.000
  2. Alice transfer the 1 Bitcoin from Binance to Bitfinex
  3. At Bitfinex, Alice sells the 1 Bitcoin for $10.100
  4. Alice transfer $10.100 back to Binance and buy 1 Bitcoin for $10.000 again

What was the profit in the example above?

In an easy calculation anyone would say that Alice did make a profit of $100.

However, there are a few things we need to consider first.

  1. How long time did step 1-4 take? Did the Bitcoin price change between step 1 and 4. Most likely, the Bitcoin price did change if Alice didnt use some kind of multi exchange crypto trading bot.
  2. How much was the withdrawal fee from Binance? If the withdrawal fee was $50 this must be deducted from the profit.

Crypto arbitrage trading can happen in one, two, or even more platforms at the time, with one or more digital coins. Arbitrages a legal process, where investors seek out those assets that differ in value at different places.

Additionally, arbitrage can be done on time basis, where investors bet on future value for the same, or more assets. Thus, it is easy to see why so many traders use bots and AI programs to help them gather data.

Cryptocurrencies are a really good sphere for arbitrage trade due to their high volatility. The price can fluctuate by large margins during a single day, leaving a lot of room for day trading. Add to that decentralization, as platforms offer different prices and you have a perfect playground for such trading.

With arbitrage trading, crypto investors capitalize on exchange rate differences in several platforms. Theoretically speaking, it is possible to purchase bitcoin in Coinbase for $6.400 to sell in CEX.IO for $6.500. Since each platform has separate pricing policies, arbitrage trading takes advantage of these to reap profits from market fluctuations.

Keep in mind that small differences usually entail large volumes for trade to make any sort of profit. Many engage in arbitrage trading, including big corporations, meaning that changes are short-lived.

Types of Crypto Arbitrage Trading

Cryptocurrencies experience large changes in value within minutes sometimes. Thus, different strategies can be used to keep up with the market trends. There are overall two main categories of arbitrage trading for digital currencies. These include spatial and pairing arbitrage trading strategies.

Spatial arbitrage refers to the investments made into two platforms. At one platform, the trader would conduct a long position as the trend allows it. At the same time, investors create short order in another platform, to counter the incoming change of the market’s direction. Through this channeling, trader hedges against fluctuations while keeping tabs open for different trends. This arbitrage tactic requires knowledge of the market, as well as on platform in terms of its size and liquidity.

Pairing arbitrage works mostly on one platform but with two cryptocurrencies. This is the most common strategy in crypto trading industry, as the market is volatile for all coins. Shorting the main crypto in the pair, trader capitalizes on changes made in both coins. USD/BTC is perhaps the biggest trading pair across different platforms at this point. You can check out how pairings work in a Binance snapshot below.

Binance trading chart

Risks Associated

In both cases, there are several risks that traders should be aware of:

– Large fluctuations can set trading pairs and platforms into a direction that investors did not anticipate

– Price changes are quite fast while arbitrage trading takes time to conduct

– Fees associated with different platform can take out good portion of your profits


Conclusion - Crypto Arbitrage Trading

With this, we answered what is crypto arbitrage trading and is it possible to make a profit from it. Cryptos are highly volatile, proposing a perfect ground for arbitrage trading. 

However, the opportunity also comes with large crypto trading risks, especially due to frequent price gangs. 

We would recommend starters to first learn the regular trade before delving deeper into the arbitrage investment.