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How to Arbitrage Bitcoin

Last Updated on January 31, 2024

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Disclaimer: This is not a validation of cryptocurrency or any particular provider, service, or product. It should not be taken as advice to engage in trading or use any services. Please check our terms and conditions.

Quick Answer:

Crypto arbitrage allows traders to profit from price differences of cryptocurrencies across various exchanges. To arbitrage Bitcoin, for example, one must purchase it at a lower price on one platform and quickly sell it at a higher price on another. This strategy requires fast action and a good understanding of market dynamics.

Arbitrage within an exchange involves trading between two different cryptocurrencies, while triangular arbitrage involves three different markets or exchanges. Utilizing software to monitor markets in real-time is crucial for spotting and acting on arbitrage opportunities.

When considering arbitrage, account for potential fees from deposits, withdrawals, and transactions, as they can affect profitability. Additionally, storing large amounts of cryptocurrencies on exchanges poses risks, so consider using personal wallets for better security.

Arbitrage trading comes with advantages such as the potential for quick profits and a vast market to explore. However, it also involves disadvantages like fees that can eat into profits and the need for significant capital to make substantial gains. Legal and safe arbitrage requires awareness of local regulations and market risks.

Crypto slippage and exchange liquidity are two factors that can impact arbitrage success. Slippage occurs when the price changes between the start and execution of a trade, while liquidity affects the ease of buying and selling assets for arbitrage. In Australia, crypto arbitrage is legal, but traders should be mindful of the risks and regulations outlined by ASIC.

Automating crypto arbitrage is possible with trading bots, which can execute trades based on predefined rules without the trader’s constant presence. Despite the automation, traders still need to set up and monitor these rules closely to ensure effective trading.

Overall, crypto arbitrage can be lucrative but requires a solid grasp of trading principles, speed, and attentiveness to market conditions and opportunities.

Nowadays there are so many cryptocurrencies with their own ecosystems and blockchains that exchanging cryptos on trading platforms is on the constant rise. People are looking for the most profitable ways to exchange Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Tether (USDT), and scores of other altcoins.

The most common and trusted way for exchanging cryptocurrencies is through exchange platforms like Kraken, Binance, Coinbase, Bitfinex, Bitstamp and others that are known for high crypto trading volumes and fast and trusted services. You can be sure these exchanges won’t rip you off with sky high-trading and withdrawal fees.

One of the most important aspects when trading cryptocurrencies is to leverage the assets’ volatility and price fluctuation to your advantage. The price of an asset may vary depending on the platforms. For instance, the price of Bitcoin isn’t exactly fixed across the market, as exchanges are adjusting the price according to variations in supply, demand, and trading volume.

This is where crypto arbitrage comes into play. How to arbitrage BTC?

To arbitrage Bitcoin, you need two exchange platforms: one, a widely popular platform like Binance or Coinbase, and the second, a less-known platform. Whenever the price of Bitcoin changes, you buy crypto from the first exchange and quickly sell them to the second platform to earn.

Keep reading as we are going to take a look at what is arbitrage trading in crypto, how it works, what its benefits and drawbacks are.

Bitcoin traffic light set on a neon background

What Is Crypto Arbitrage?

Essentially, crypto arbitrage can be described as a technique that enables traders to make a profit, based on the difference in crypto prices on different exchanges.

Since each exchange defines its own value for a specific currency based on market circumstances, there would always be a difference in value if you compare several trusted crypto exchanges. Crypto arbitrage is simply taking advantage of the price discrepancies by buying a certain amount of crypto at one exchange and selling it right away at another to make a profit from the transaction.

The thing is, you have to be really fast and skilled to successfully perform crypto arbitrage and make money from it.

Trading cryptos may seem like an easy way to make money, and it could possibly be so, but you have to master the basics of trading first in order to know how to read the market price movements and use them to your advantage.

The crypto market is highly volatile and you simply can’t predict when the prices of a certain currency will rise or drop, and when they do, you also can’t know how long it will last. It is necessary to analyse the change pattern of price charts so you can predict future fluctuations and know when to buy crypto or sell them.

You have to carefully pay attention and quickly act when the price of a certain asset starts rising. If you know from your experience as a trader that the rise will cease quickly, then you have to act fast and buy some of the crypto in question at an exchange that offers a lower price and sell it at one that gives it a higher market value.

Arbitrage Within an Exchange

There are two types of popular crypto arbitrage trading strategies: arbitrage within an exchange and triangular arbitrage. We are just going to mention this first type briefly.

Arbitrage within an exchange can only happen between two different cryptocurrencies with different prices. This means that you buy a crypto like Bitcoin and sell it for another currency like Litecoin when there is a profitable price difference.

Triangular arbitrage

Triangular arbitrage is the main type of arbitrage for experienced crypto traders. In finance, this is called spatial arbitrage and it involves three parties, or in the case of crypto assets, three different markets or cryptocurrency exchanges.

Current market of Bitcoin on phone and laptop

How Does Cryptocurrency Arbitrage Work?

One of the main factors of arbitrage is the difference in trading volumes between exchange platforms. Large exchanges have a higher volume of trading which can lead to lower prices of certain cryptos, while smaller exchange platforms maintain higher asset prices because their trading volume is far lower.

Buying a substantial amount of some cryptocurrency at a popular exchange platform for a reasonable price and then selling it real fast at a lesser-known but trustworthy exchange is a good way of making some quick cash.

Crypto arbitrage trades can also happen when trading between different time zones, geographical areas, and times of day. In case a crypto value drop happens at 3 AM US time when most people are sleeping, someone in a different timezone can make nice profits just because most of the US crypto traders weren’t even aware of what was happening on the market while they were sleeping.

Many financial events can also trigger a rise or fall in value for a certain cryptocurrency or even for whole portions of the market, driving a surge in many crypto assets.

The key is to notice an opportunity and act quickly and strategically. This is why experienced arbitrage traders follow day-to-day economic news from all parts of the world, paying close attention to factors that may cause a stir on the crypto market. Changes in local laws and political turmoil in certain regions can influence the prices of digital assets, just as they influence the prices of oil, gas, and gold.

When closing an arbitrage you need to be fast. Depending on the crypto assets you are trading, the transfer confirmation time can take 10 to 30 minutes for some of the most popular cryptos, so you need to assess the situation well.

Arbitrage Opportunities on Crypto Markets

In order to achieve an arbitrage deal and make the most out of it, you need to prepare for a surge or drop of crypto value. When the price of Bitcoin or any other altcoin starts rising, you don’t have the time to start randomly comparing exchange rates on other platforms.

It can only take a couple of minutes for the surge to stop for most exchanges to have a similar value for BTC once again.

This is why you should use software apps to track cryptocurrency markets in real time. You can instantly react, make a move, and achieve an arbitrage with your funds. Monitoring opportunities with adequate software is a great tool for arbitrage.

Bitcoin coin lies on the red candles of downtrend

Arbitrage Trading

These are some of the important factors you need to consider if you want to start arbitrage trading:

  1. Make a plan on how much money you are prepared to invest in arbitrage trading. Carefully decide how much funds you will be putting into specific trades. Decide what your limit is and stick to that decision. If you start increasing your limit uncontrollably when you think an arbitrage opportunity is good, you can endanger your funds and possibly lose a lot more than you would earn.
  2. Look out for new cryptos on exchange platforms. If you see a new currency listed on some exchange, the demand and trading volume is probably very low or nonexistent for that crypto. This doesn’t mean that it will stay that way and this is why you should pay attention to new cryptos in case a surge in prices happens, so you can quickly buy and sell, making an arbitrage.
  3. Trade quickly or don’t trade at all. The crypto market is highly volatile and changes happen really fast. If you aren’t sure whether to buy some currency or not, then don’t buy it. Make only moves you are sure about, because arbitrage isn’t about gambling. It is about making serious financial decisions based on hard facts.
  4. Constantly monitor the market. Since fluctuations of trading volumes are happening non stop, you need to pay attention, especially when periods of volatility are happening. When a surge in value happens, you need to decide whether to buy the crypto in question immediately and then sell it at a better price. Monitoring the market is crucial for you to notice a good business opportunity.
  5. Diversify the portfolio of exchange platforms you are monitoring for arbitrage opportunities. If you just look at a couple of exchanges, chances are you are rarely going to notice arbitrage opportunities. On the other hand, if you diversify to include a larger number of both popular and smaller exchanges, your chances will get much higher.

Advantages

These are the key advantages that make arbitrage trading a great option for earning money:

  1. Arbitrage is a great way of making money fast. When trading arbitrage, you can make a profit as soon as your transaction is finished. Depending on the asset you are trading, this can take between 10 and 30 minutes. With classic trading of cryptos, you buy some assets and then hold onto them to sell later. Arbitrage is much faster.
  2. The crypto market is really huge. There are more than 300 crypto exchanges on the web and there are thousands of currencies you can trade. It’s all about finding the right opportunity and taking it. Plus, you can do all of this using a smartphone or PC.

Crypto volatility is a key factor in creating arbitrage opportunities and it won’t stop any time soon. Volatility of value is one of the main characteristics of the crypto market, compared to the relatively stable market values of oil, gas and gold. You can’t see the price of oil jumping 30% in a couple of hours, while this can really often be the case with cryptocurrencies.

Disadvantages

These are the main drawbacks you need to consider regarding arbitrage:

  1. No one likes fees and in arbitrage trading you have to take a lot of fees into consideration. Exchange platforms don’t let their users deposit, trade, or withdraw their funds for free. All of these actions cost money, so you need to be careful and take the fees into account when doing arbitrage.
  2. The issue of storing your coins on exchange platform accounts is also very important, since it is much safer to store your crypto in a wallet than on the platform itself. However, if you store it in your wallet, then it will take much longer for you to make an arbitrage than if you have the funds directly on the exchange platform. Also, platforms can be prone to security breaches and hacking attempts, so you need to consider these risks when arbitrage trading.
  3. To make serious profits from arbitrage, you need to invest larger amounts of crypto. Sure, you can trade low amounts and achieve modest profits, but if you really want to earn money you need to increase your trading volume, which means that you are also taking a bigger risk. This is why it’s important to first master all the basics of monitoring the market and making the right decisions.
Bitcoin coin lies on the green candles of uptrend

Bitcoin Arbitrage

Bitcoin Arbitrage Example

Let’s take a look at a Bitcoin arbitrage example just to show you how it actually works.

  1. There are two crypto exchanges called Exchange A and Exchange B. They both deal with Bitcoin.
  2. Exchange A is one of the major exchanges on the market with one of the highest trading volumes where 1 BTC is valued at 60,000 USD.
  3. Exchange B is a far less popular platform, which doesn’t have a high trading volume and thus has higher prices for the traded cryptos. Here, 1 BTC is valued at 60,050 USD.
  4. An event happens that pushes the BTC trading volumes up a notch. For instance, Elon Musk recently endorsed Bitcoin as a great currency and announced that his company Tesla has purchased 1.5 billion USD worth of Bitcoin.
  5. The BTC price now increases at Exchange A to 61,000 USD and the price of BTC at the smaller Exchange B increases to 61,200 USD because it has a lower trading volume than the bigger, more popular exchange.
  6. This is where an arbitrage happens. If you act quickly, before the price difference becomes insignificant, you can buy BTC at Exchange A and then sell it at Exchange B, earning 200 USD per coin, and thus making a nice profit.

Disclaimer: This example doesn’t take into account the difference in fees and is only meant to show how a Bitcoin arbitrage works.

Factors That Influence the Outcome of Bitcoin Arbitrage

The example above omitted the fees, so let’s take a look at what fees you need to consider when making a BTC arbitrage, so you can calculate your potential profit and whether or not it’s really worth it.

  1. Fiat deposit and withdrawal fees – When depositing fiat currency on an exchange platform, you have certain fees and the same goes when you want to withdraw the cash to your bank account. Be sure to check the fees especially in case you want to deposit or withdraw large sums.
  2. BTC deposit fees and withdrawal fees Even if you already have some BTC and want to deposit it on a certain platform so you can start trading it, you also have to pay a fee and the same goes when you want to withdraw your assets to your wallet or a third party location.
  3. Transaction fees – Transaction fees, also known as trading fees, are the third type of fees you need to take into consideration. These fees are usually lower when trading higher volumes of BTC and each platform decides on them individually.
Women's hands are looking at data and making arbitrage trading on cryptocurrencies

Frequently Asked Questions

What is crypto slippage?

Crypto Slippage occurs when the price of Bitcoin drops after trading has started. This happens because traders sell off their positions at the start of the market, causing the price to drop. The opposite also happens – when the price rises, traders buy back into the market, which causes the price to rise.

How does the liquidity of crypto exchanges affect arbitrage trading?

Arbitrage trading is when traders buy one asset at a lower price and sell another asset at a higher price. The difference between these two prices is called the spread. If the spread is too high, then arbitrageurs may be able to profit from buying assets at a lower price and selling them at a higher price. However, if the spread is too small, then arbitrageurs cannot profit from the spread. Therefore, liquidity affects arbitrage trading. Liquidity refers to how much money is available for purchase or sale of an asset. A liquid market has large amounts of buyers and sellers, which makes it easier for arbitrageurs to trade.

Is arbitrage legal in Australia?

Yes, it is completely legal for Australians to trade cryptocurrencies such as Bitcoin, Ethereum, Ripple, Litecoin, etc. However, they must be aware of the potential risks associated with trading digital currencies. The Australian Securities & Investments Commission (ASIC) has warned consumers about the risks involved with investing in cryptocurrency. ASIC also warns against using unregulated exchanges when buying or selling digital currency.

Can you automate crypto arbitrage?

Yes, you can automate crypto arbitrage using a trading bot. A trading bot is software that automatically executes trades based on pre-defined rules. The advantage of using a trading bot is that you don’t need to be present when the trade occurs. However, you still need to set up the rules for the bot to follow.

A Few Words Before You Go…

Crypto arbitrage, especially with Bitcoin, can be a very attractive way of earning fast money. But before you start doing it, you need to learn all the basics of arbitrage and get to know the market.

About The Authors

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Written by

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Brian Nibley, a freelance writer and cryptocurrency aficionado, brings nearly a decade of expertise in blockchain and crypto journalism.

His profound understanding of the crypto market and commitment to educating others shine through in his articles, offering readers valuable insights into the world of cryptocurrency investing.

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Edited by

Co-Founder / Managing Editor

Adam Morris, the co-founder of Crypto Head and a respected crypto expert, offers insightful commentary and analysis on cryptocurrency, NFTs, and the evolving digital landscape.

His extensive experience and features in top-tier publications like Forbes and CNN underscore his deep understanding of the crypto world and its future potential.

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