The rapid growth of the cryptocurrency market has created new opportunities for arbitrage traders. As the cryptocurrency market is young and highly decentralized, it offers the right kind of environment for nimble traders looking to take advantage of market inefficiencies to make money.
Arbitrage involves buying and selling the same security when a price discrepancy is detected. An arbitrage trade can happen on the same trading platform or on different trading platforms. Suppose that XYZ is trading at $10 on Exchange A and at $10.05 on Exchange B. An arbitrage trader might buy XYZ at $10 on Exchange A and simultaneously sell it at $10.05 on Exchange B, making $0.05 in profits. This is an oversimplification of the process, not least because the trader will have to pay commission fees on the trades, but the example illustrates what an arbitrage trade might look like.
In theory, arbitrage trading can involve any financial asset. In practice, arbitrage works best in a market that is highly decentralized and, therefore, at least somewhat inefficient. With its high number of exchanges, the cryptocurrency market is one such place. The same cryptocurrency might be trading at somewhat different prices on two exchanges. An arbitrage trader would buy cryptocurrency coins on one exchange (the one with the lower price) and transfer them over to the exchange with the higher price for subsequent sale there. The difference between the buy and sell prices is the trader’s profit.
While this seems easy enough, there are a number of things that arbitrage traders need to consider. As has already been mentioned, commission fees need to be taken into account. Aside from the commission fees that typically need to be paid when you buy and sell cryptocurrencies, additional fees might be levied on transfers between cryptocurrency exchanges. The exchanges might also charge the trader additional deposit and withdrawal fees. The trader will need to make sure that the spread between the prices is large enough to cover all the fees - and still leave a profit for the trader.
There are other considerations. One is competition. Other arbitrage traders have also discovered the cryptocurrency market, and the continued influx of arbitrage traders reduces the number of arbitrage opportunities and diminishes potential profits. To succeed as an arbitrage trader, you will need to outsmart the competition.
Time is another thing to consider. It takes time to transfer crypto assets from one exchange to another. By the time you finally complete the transfer, the price difference might have been corrected, in which case your expected profit could be in jeopardy. Time is truly of the essence here, and can mean the difference between a gain and a loss.
A third consideration is liquidity. The most popular cryptocurrencies might not offer many price differences to exploit, so arbitrage traders may need to gravitate to more obscure cryptocurrencies. The problem with more obscure cryptocurrencies is that they might not be very liquid. There are fewer counterparties available to be on the opposite side of your trade, and this limitation can render your arbitrage strategy less effective or not effective at all.
There are ways to mitigate these problems. One is to maintain several cryptocurrency balances on several exchanges at once. This eliminates the need to move crypto assets from one exchange to another to execute an arbitrage trade. Your initial buy and sell transactions take place within the exchanges; you need only make a transfer to restore the original balances. However, this tactic requires more extensive financial resources; in the absence of those, the trader is limited to a small number of cryptocurrency exchanges.
Another tactic involves using three or more different instruments on the same exchange. For example, an arbitrage trader can buy Ethereum coins, sell them in exchange for Bitcoins, and finally sell the Bitcoins for USD - all on one exchange. This can be an effective approach, but the trader will need to be very agile. Prices can change quickly; the more currencies involved in the trade, the higher the probability of an adverse price move during the execution of the trade.
CryptoArbitrage bot for latency crypto arbitrage
Today I would like to explain the way of crypto arbitrage on 1 exchange only and how to adjust crypto arbitrage bot for latency crypto arbitrage or 1 leg crypto arbitrage trading method. This method more acceptable than a hedge crypto arbitrage for cryptocurrencies traders with small capitals for several reasons:
1. With small deposits your commission will be higher and with a hedge crypto arbitrage it will be more difficult to achieve difference between cryptocurrencies to cover commissions + spreads;
2. For hedge crypto arbitrage you need to keep a deposit of several crypto currencies.
For these and other reasons a lot of crypto traders prefer latency crypto arbitrage.
How to make proper setup for latency crypto arbitrage.
First of all you need to find exchange with faster quotes for crypto currencies. Usually faster exchanges with large trading volume and for now you can use Huobi. You do not need to open account with them because it is not necessary to have account to receive quotes.
For trading you can use exchange which allows to trade a lot of altcoins.
In order to understand which altcoins on your exchange are suitable for trading, you need to follow several rules:
1. Altcoin should be actively trading – price should change frequently, and arbitrage situations arise;
2. Price difference between fast feed (Huobi in our example) and your crypto crypto exchange should not hold long enough to be able to complete a deal;
3. The trading volume of the investigated altcoin should be high enough to exclude altcoins whose popularity is promoted by special crypto bots.
To find altcoins, run VIP Crypto arbitrage software in emulation mode add all possible altcoins with bitcoin (BTC) based crypto currency and check for 1 week.
For live trading leave only altcoins satisfying the above conditions.
How to setup VIP Crypto Arbitrage software
To make proper setup you need to:
1. Select “allow buy” on exchange for trading and “allow sell” for fast feed exchange. In this case you can have deposit only in one currency – bitcoin (BTC);
2. Select “Virtual” for fast feed exchange;
3. Select “Check Quantity” – check if there enough liquidity in TOB Top of the book to fill an order with the specified lot size, if not arbitrage situation will be ignored;
4. Click “Order management” and adjust trailing stop
Order management - calls trailing parameters management window for the selected side. Trailing options window will appear only when editing existing hedging pair, you can't adjust these parameters when adding a new hedging pair.
5. We recommend “Profit mode” –> currency and Diff input -> percents
Difference to open can be around 2% , but difference to close should be high ( you can set 20%)
This method was successfully tested by us and our clients and I hope this article will help you to be successful crypto arbitrage trader as well.
None of this is meant to be discouraging. You have to be an astute trader to make money on any financial market. Being an astute trader means you need to be aware of all the risks and your trading strategy should factor in all possible limitations. The cryptocurrency market is a burgeoning, dynamic place that continues to offer opportunities to intelligent arbitrage traders who come to the market prepared.
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