Arbitrage trading has potential in making hefty sums. Arbitrage.expert’s Chief trader Jonathan B. is about to show you how we’re doing it consistently.
Last Updated: 03 November 2019
The idea of arbitrage trading has held many folks a merchant’s fixation, especially when it can be done over and over again. Arbitrage, is the commonly known practice of simultaneously buying & selling a commodity for a profit.
Cryptocurrency arbitrage is made possible by a definitive differential in trading volumes between two or more markets. Unlike the stock market, the cryptocurrency isn’t centralized, therefore the difference in prices will significantly vary from one exchange to another. In the 1970’s, when the first computer made the trading process almost instantaneous, many traders realized they could easily pick up a commodity in a market where the prices were lower & simultaneously executing an order to sell in a different market where the commodity was much more expensive. Because of the growing demand for the quantitative systems made to spot aberrations in the bond and stock, as well as foreign exchange markets. There are not too many of these types of opportunities can be easily spotted, at least not ones a retail trader can reasonably profit from. For the exception of digital currencies.
Cryptocurrency assets like Bitcoin, Litecoin, Ethereum and Ripple are among many that represented a bonanza for virtual arbitrage traders. Trading volumes have risen almost everywhere in the world, meanwhile the primary exchanges, on which cryptocurrency trades still remain problematic for many due to KYC - money laundering - a process that many exchanges require to perform, before legally accepting meaningful sized orders. During periods when inconsistent barriers to enter the market is combined with a bullish market, arbitrageurs come out with full force.
A Real Live Example: How to profit from arbitrage between Bitcoin and USD
How does an average cryptocurrency enthusiast get ready for arbitraging digital currency then? For a start, it helps to have a registered account with as many exchanges as possible, so that if an arbitrage opportunity presents itself, we can easily utilize it without wasting much time. Secondly, you need to have a reasonable amount of funding so that a few percentage points in profit you make are worth the effort. Finally, I would recommend getting verified with the most popular exchanges, where you would feel comfortable depositing and withdrawing fiat. Always try to stick to exchanges with lowers deposit/ withdrawal fees. I will cover a list of my favorite exchanges that I regularly deal with.
A cryptocurrency arbitrage opportunity app has been developed to present arbitrage opportunities across most popular exchanges and teach an average Joe how to profit from a digital currency arbitrage. Let’s begin by clicking on the header link below.
By selecting all exchanges from the drop down, we’re going to tell the expert to collect pricing data across all exchanges on the list. For the purposes of this example, we’re going to select BTC/USD pair (Bitcoin / USD).
The left side column represents an action to “BUY”, while the upper row represents an action to “SELL”. A couple of things need to be considered before making the best possible arbitrage selection:
- 24 Hour volume - the 24 hour volume represents the liquidity for the selected market. The greater value tells us there are a lot of buyers and sellers, ultimately signaling for a healthy market that lead to quick order execution.
- Bid / Ask spread - represents the balance between the buyers and the sellers. Alternatively, if the spread between the bid and ask is tight, its surely a good indicator to proceed with the arbitrage attempt.
When making a selection, I pay attention to the bullets described above. For the purposes of this example we’re going to select Bitfinex and Exmo.io
To keep the data fresh, the arbitrage algorithm is designed to make API calls every 1-2 minutes to each exchanges from the list.
Being a long time Bitfinex trader, I could confidently state that BTC/USD liquidity pool contains plenty of buyers and sellers, even for the big volume traders. To be able to execute this arbitrage trade, you must have a registered accounts with both Bitfinex & EXMOI personally recommend registering with as many exchanges as possible, because you just never know where the opportunity presents itself. It's better to be ready, than not.
EXMO is also on my favorite list, due to its fast order executions and deep liquidity for some of the most popular pairs.
For the purposes of this example, we will assume that a fiat deposit of $9,000 has already been made and is now available at Bitfinex. After paying the deposit fee of 0.10% or (min. $20), my available Bitfinex balance is now $8,980 USD.
Arbitrage.expert team made fees schedule available right at your fingertips. Simply switch to extended view and click on “Fees” link next to the exclamation mark.
Please note: Fortunately or not, the fee rates and terms frequently change. Due to lack of assistance, arbitrage team isn’t always able to keep the rate values updated. Therefore, a team effort model was adopted (wikipedia editing style). The accuracy of the rate values will solely rely upon user contribution. Should you find a discrepancy between actual and the displayed data, simply double tap on the value to make a correction. Upon review, an administrator will either approve or deny the change.
Model I - simultaneous execution
Requires to have fiat ready on Bitfinex and Bitcoin on EXMO
Now, lets go ahead and submit a Bitfinex order to buy 1BTC for $8201 and a simultaneous order to sell 1BTC at EXMO for $8682 (assuming EXMO BTC wallet is pre-loaded with 1 BTC.
|Exchange||Order Type||Order Amount||Taker/Maker Fee||Net Profit|
|Bitfinex||Buy||1 BTC for $8201||0.10% ($8.2)|
|EXMO||Sell||1 BTC for $8682||0.20% ($17.36)||$455|
As result of the successful transaction, our Net profit is $455
Model II - delayed execution
Requires fiat to be ready on Bitfinex
After submitting an order to buy 1BTC for $8201 on Bitfinex, the next step would require to transfer 1 BTC to EXMO in attempt to perform an action to sell 1 BTC for $8682. Unlike the first model, the delayed execution involves the market risk. While the bitcoin is in route from Bitfinex to EXMO, the arbitrage opportunity may completely disappear, ultimately making it unprofitable to sell. In that case I would hold the coin until the price rises again. Depending on the market conditions, I may settle for the loss instead. I will discuss some of the loss minimizing strategies in my future posts.
Arbitrage Step II
Arbitrage.expert was designed to identify multiple opportunities between various altcoin pairs, in attempt to display hidden doorways that are made to assist in transactions similar to the one displayed above. Earlier example clearly illustrates an instance where a successful arbitrage transactions may’ve led to temporary stall. We all know that the ultimate goal of the arbitrage strategy is to be able to successfully perform an arbitrage transaction, while maximizing profits and minimizing the fees. Even the most lucrative arbitrage opportunity, may easily turn sideways, if fiat cannot be easily withdrawn or converted and later transferred to another exchange with more favorable conditions.
An instance which ultimately resulted in successful arbitrage trade, the fiat in my EXMO account either needs to be converted back to another coin, or withdrawn to bank account. Due to multiple reasons like the EXMO’s hefty withdrawal fees, as well as unlimited urge to generate bigger profits, I will go ahead and convert $8664 USD to Ethereum, where 1ETH = 0.0735 BTC, forward the ETH back to Bitfinex and trade it again for BTC. At this point, if the arbitrage is still present, I can repeat the process all over again. Please keep in mind, the trade fees can around up to 0.40 - 0.50%.
While some arbitrage opportunities may seem very attractive, I would advise to proceed with caution, especially for those who’re just getting their feet wet. Don’t try to kill a whale with the first arrow, start with the goldfish, and as you get more comfortable, slowly work your way up. Opposed to many other trading algorithms, arbitrage may not seem as complicated at first, however, I wouldn’t take the associated market and liquidity risks lightly.