Crypto Arbitrage Guide — How to Make Money as a Beginner
Arbitrage is the process of buying cryptocurrencies at a lower price and sell it a higher price. Cryptocurrency arbitrage is a type of trading that takes advantage of the differences in prices to make a profit. These price differences commonly referred to as “arbitrage spreads”, can be used to buy a cryptocurrency at a lower price and then sell it at a higher price.
For example, if BTC ( Ethereum) is being sold for $2200 on Coinbase Pro and $2195 on Binance. You could buy some amount of Eth at a lower price and sell it at a higher price. There are various types of arbitrage that exploit price differences in multiple ways. However, they all involve finding these spreads and quickly acting on them.
In 2022 the types of crypto arbitrage spread anywhere from 0.2%-4%. Sometimes upwards of 20% will appear but they’re rare. If you can act on arbitrage spreads enough times in a day though, it can be worth your time. Arbitrage is a great tool when prices aren’t moving much in a day and other crypto day trading strategies, such as swing trading, aren’t entirely viable.
HOW TO FIND ARBITRAGE OPPORTUNITIES
For example, we’ll look at how to find spatial arbitrage opportunities. This involves looking for price differences between two exchanges where the spread is large enough that you can make a profit even after trading fees. You might want to start by checking which coins have had a decently high volume for liquidity, or price volatility. However, that will be up to you to find what works best each day.
There are four important factors to consider when looking for spreads:
- FEES: The spread must be large enough that you’ll make a profit after trading fees. If you’re paying 0.2% on your buy and 0.25% on your sell, you won’t make a profit if the price difference was only 0.1%. Therefore, you may want to only search for spreads above some threshold, say 1%.
- ASK AND BID RATES: You want to be looking at the top of the order book on each exchange. When buying you’ll be filling the ask order on that exchange. Therefore, you look at the ask order’s rate and amount. When selling you’ll be filling the bid order on that exchange. Therefore, you look at the bid order’s rate and amount.
- AVOIDING SLIPPAGE: Slippage occurs when you don’t get the price you expected. If the latest ask is for 0.1 Eth at a rate of $2400 but you buy 0.15 Eth, you’ll get 0.1 at the rate of $2400, and the other 0.5 Eth at a worse rate because you’ll be filling the next order in the order book. To avoid slippage your orders can’t be larger than the smallest of either the ask or bid orders that you’ll be filling.
- POTENTIAL PROFIT: If a spread of 30% exists but the ask order that you’ll be filling is only for $1 worth of the asset, your max profit won’t be more than $0.30. So let’s say we want price differences that are >= 1% and have an order size that will allow at least $10 in profit. You can either open up multiple exchange websites and try to calculate price differences and check order sizes manually. Or you can use some sort of software tool to help in the process. Realistically since arbitrage spreads may only exist for a second or less you’ll probably want to use a tool to assist with the process.
Arbitrage Trading can be a great approach to day trading crypto, but it comes with its own set of benefits and downsides. The ability to realize an immediate profit without waiting and watching charts is certainly appealing to some, but the prospect of competing against other traders and bots to be the first to fill an order can be intimidating to beginners. Best of luck!