Cryptocurrency arbitraging is simply the process of buying a cryptocoin from one exchange and selling that same coin on another exchange that prices it at a higher value.
For instance the price of Bitcoin varies slightly on various exchanges this is largely due to the fact that these exchange markets are not directly synced and volumes of trade differ per exchange; it leads to slight price differences for same crypto-assets on various exchanges. These price differences present an opportunity to earn and make some profit especially for the day trader.
Using Bitcoin as an example – as at the time of writing this article Bitcoin is priced at $8.778 on Coinbase, whiles on Binance it is trading for $8,780 showing a difference of $2 for the same crypto-asset on the two different crypto exchanges. Buying say 5 BTC off Coinbase and selling it Binance will mean you will be making earnings of $2 on each coin which gives a total of $10 and this will work only if the trading transactions are being executed within a short time frame.
The trader can ‘rinse repeat’ this process of buying on Coin base and selling on Binance consistently within a given time frame and make some significant earnings. One must however note that there will be transaction charges but ideally these charges should be intangible as compared to total earnings. Also, Bitcoin was only used as an example but there are other coins with faster transaction time in comparison to Bitcoin and these coins are likely better alternatives for crypto arbitraging.
Further explaination is given in the video from Mpho Neluhheni’s YouTube Channel below;
The following however are drawbacks to cryptocurrency arbitraging;
- The time frame for transactions could get extended within which period price changes can occur and trading outcomes get impacted either leading to smaller profit or no profit at all. That is why as described in the video above, it important to be quick and actually have funds on both exchanges simultaneously such that fund movements from one exchange to the other will be done within very few seconds to minutes so as not to miss out.
- A sizeable amount of cryptocoins are needed in order to earn significant profit from arbitraging.
- Depositing of fiat currency on exchanges could delay thereby eating into trade times and this could lead to price changes which eat into or even wipes out projected profit.
- It is also important to note the liquidity of the exchanges being used in arbitraging is quite important. Transactions are usually easier and faster on exchanges with higher volumes in comparison to those with lower volumes.
In all of these however, it is important to Do Your Own Research (DYOR) and find out which trading methodology best suits you. You should not just take trading information on face value, read wide and apply the strategy the sits best with you.