How do you find the best crypto offer on exchanges?
Cryptocurrency arbitrage is one of the most rewarding cryptocurrency sector trading opportunities. A savvy trader with a robust crypto arbitrage scanner can reap massive low-risk profits in the market by playing various crypto markets against each other.
To start us off, this is not investment advice. It is informational. You can combine the nuggets held within it with your research and build a rewarding crypto arbitrage strategy.
Few crypto arbitrage traders illustrate the potential that crypto arbitrage presents as Sam Bankman-Fried does. He is one of the cryptocurrency sector’s youngest billionaires. Sam launched FTX, the cryptocurrency exchange that made him his riches in 2017, right in the middle of the wildest bitcoin bull run.
FTX was an obscure firm, but it rose to prominence on the back of lucrative crypto arbitrage opportunities. Using his ETF trader experience, Sam Bankman-Fried took advantage of the kimchi premium and the Japanese market’s huge appetite for BTC and built a $9 billion fortune in a few years.
In 2017, the world’s most popular cryptocurrency would sell at $10,000 in the US but retail at $15000 on South Korean exchanges. The demand for BTC was so high that at the peak of the bull run, BTC trades had a 50% spread!
The kimchi premium presented a unique crypto arbitrage opportunity for small-scale traders. But the Korean government heavily regulates the movement of the won currency, so Bankman-Fried and other large-scale arbitrage traders took their trade to Japan.
The land of cherry blossoms had a lower BTC spread of about 15% at the peak of the trade, but the won had an easier offloading process. Cryptocurrency traders would purchase their BTC in North America and deposit it in a Japanese exchange. Then, they would mark up the price to $11,500, sell and convert these sales back to dollars.
Crypto arbitrage traders would repeat this process making at least 10% on their trades each weekday. Large-scale traders, however, mint an arbitrage fortune in East Asia because they had global frameworks that would underpin the movement of millions of dollars between different regulatory ecosystems.
Small-scale traders still had a field day in arbitrage, making their riches from the kimchi premium. This event is an excellent description of the cryptocurrency sector’s arbitrage opportunities.
Defining crypto arbitrage
Arbitrage is a trading strategy. Crypto arbitrageurs perform a digital currency’s concurrent purchase and sale in different markets. Arbitrageurs profit from itty bitty differences in a crypto asset’s listed price by exploiting temporal variations in the values of similar or identical crypto assets in other markets. You can use Algory crypto scanner to find the best arbitrage opportunities (example in the video below).
They exploit the cryptocurrency sector’s market inefficiencies for profit. Inefficient markets, as per the decade’s old efficient markets hypothesis, states that some financial asset prices do not expressly reflect their true value.
Inefficiencies may be a reflection of the liquidity variance across various crypto exchanges. They could also highlight supply and demand metrics across multiple regions. On top of that, they are a function of the transaction, deposit, and withdrawal time variances across exchanges.
Other factors such as forex rates, regulations, capital controls, costs of trades, and their spreads could create inefficiencies that create crypto arbitrage trading.
How to find crypto arbitrage opportunities
Use a crypto arbitrage scanner.
In 2017, the cryptocurrency market was relatively immature. Market inefficiencies led to high volatility. Crypto arbitrage was therefore effortless and lucrative. As a result, the cryptocurrency market is now a maturing market.
Liquidity is on the rise, lowering some inefficiencies. Moreso, new players have come in, bringing in powerful crypto arbitrage tools such as bots with crypto arbitrage scanners. The days of massive quick profits are long gone as the markets tighten up due to high volume traders.
The market still has lots of opportunities for the trader since the cryptocurrency sector’s trades are still slow and inefficient compared to the stock indexes’ nanosecond trade sessions. Crypto arbitrageurs can still reap massive returns from these inefficiencies.
You can counter the flagging inefficiencies using a crypto arbitrage scanner like the Algory Crypto Scanner. So while you may no longer have access to 50% spread opportunities, there are brief period sizable arbitrage opportunities that you can take advantage of when you have a crypto arbitrage scanner.
This crypto arbitrage scanner leverages speed, scanning the market’s news and actions instantly. It will open access to real-time data highlighting the arbitrage potential in 800 plus crypto assets in various crypto exchanges.
The Algory News Scanner, on the other hand, monitors thousands of cryptocurrency sources in one intuitive interface at a time. As a result, the crypto and news scanner can open doors to juicy arbitrage opportunities, such as India’s recent plunge in crypto prices.
In late November 2021, cryptocurrency prices in India took a nosedive due to rising fears of a digital asset ban. As a result, the WazirX crypto exchange traders could purchase Dogecoin and Shiba Inu at 80% of their value in Kraken or Binance.
Bitcoin was also selling 14% lower on WazirX, presenting an excellent arbitrage opportunity for the savvy trader. So they bought the dip and traded these cheap assets for profit on other exchanges. However, these traders could only get a hold of these opportunities by being the first to the deal.
When the rest of the market caught on to this windfall, they thronged the WazirX, causing a system-wide crash that halted trading. Late traders could not move their crypto assets, causing losses in arbitrage.
Speed is the name of the game in cryptocurrency arbitrage since price gaps have a very short exploitation window. Use a crypto news aggregator to access real-time crypto news for the market’s most influential sites, blogs, and social media channels for quick decision-making.
Use automated crypto arbitrage bots.
Automating your trading strategy can give you much leverage in cryptocurrency arbitrage. Use your crypto arbitrage scanner to seek out arbitrage opportunities, then make your trades. That said, manual arbitrage can be a complex undertaking.
You will, for instance, have to place all your trades, then transfer your funds to your accounts manually. You will also need to monitor all price differences and make an order at the right time.
Fortunately, a wide choice of arbitrage bots can ease the same exchange or cross-exchange trading. They will track all your trade’s price movements and highlight the little differences that could bring in many profits.
These bots will also execute trades at lightning speeds on your behalf. That said, automated crypto arbitrage bots or scripts are complex. As a result, you could need to learn code or enroll in trading software education to stay profitable.
Study trading charts
You can time your arbitrage trades just by studying your cryptocurrency trading technical analysis tools and charts. Technical analysis is the study of resistance and support levels and candlestick patterns.
There is, however, one more weapon to this arsenal that could help identify crypto arbitrage opportunities. The relative strength index (RSI) is a supplemental indicator that pinpoints crypto asset prices way above their true value.
The RSI will locate arbitrage opportunities early, giving you access to their benefits long before a market correction occurs. When you use RSI indicators, you will enjoy fantastic trading entries in ultra-volatile crypto markets.
The RSI’s beauty is that it is easy to use, despite its rather complex formula. Its formula works in the background churning values between 0 to 100 on your charts. Moreover, its oscillator-like wave type pattern will automatically give undervalued or overbought values.
A chart will generate an RSI figure below 30.00 when it is undervalued. This range shows that a crypto asset’s prices are prepping for a corrective rally. Should the asset’s buying pressure rise, the RSI could cross the 70.00 range.
This spectrum shows that the asset is overbought and has little buying pressure. An overbought asset is about to go to its cool-off period and presents a take-profit opportunity in your position.
Types of arbitrage opportunities
There are various forms of crypto arbitrage opportunities, such as;
Spatial arbitrage is the trade of crypto assets across two exchanges. It is a straightforward process that takes advantage of cryptocurrency price discrepancies between two exchanges. However, spatial arbitrageurs are vulnerable to cross-exchange transfer costs and slow settlement speeds.
Here, arbitrageurs leverage pricing inefficiency across pairs of crypto assets within one exchange. For example, you could start a trade using one digital currency and trade it for a different but undervalued asset. Trade that undervalued asset for a relatively overvalued cryptocurrency, then complete the arbitrage trade by purchasing your original cryptocurrency.
If your third crypto asset is more overvalued than your original asset, you will make little profit after you have completed the circuit.
Cryptocurrency market inefficiencies that generate crypto arbitrage opportunities
Arbitrage locates crypto-asset mispricing data in exchanges for profit. These mispricing may occur due to forces such as;
In October 2020, Filecoin, a decentralized file-sharing protocol, went live trading on various exchanges. Metric sites such as CoinGecko pegged its price at $29. It was, however, selling at $68 as per CoinMarketCap.
The Uniswap DeX was selling the coin at $25.56. When Huobi kicked off Filecoin trades, it priced the cryptocurrency at $50. As more people got into the market, the token rose to $200 in a short period.
Cryptocurrency prices are highly speculative, and the fear of missing out (FOMO) significantly affects cryptocurrency prices.
Liquidity differences across exchanges
Cryptocurrency exchanges have order books that have varying liquidity for each asset. For example, one exchange could have high bitcoin liquidity but low BNB levels. As a result, Bitcoin trade on this exchange will be effortless and cheap, but converting your BNB to cash on this exchange could lead to losses due to low liquidity.
Purchase your crypto arbitrage assets in an exchange with a wide order book, then sell them in an exchange with deep liquidity for higher profit.
Costs of transactions
Exchanges have diverse withdrawal and deposit times. Consequently, slower exchanges present a crypto arbitrage opportunity because their asset prices do not match the fast exchange’s market-priced assets.
Currency conversion rates
Varying forex rates present juicy arbitrage opportunities. You can, for instance, turn a profit by converting your USD to yen when the US dollar gains against the yen, but the price of BTC is constant in US and Japanese exchanges.
Convert your dollars to yen, then purchase your BTC in a Japanese exchange. Finally, complete the arbitrage trade by selling your BTC in a US exchange for profit.
Supply and demand forces
Most cryptocurrency markets have their asset preferences, hence the kimchi premium. East Asians might have a deep hunger for BTC, while North Americans have a thirst for ether. A crypto arbitrage scanner can help you keep up with the market’s demand sentiment.
Diminishing inefficiencies are a threat to the ultra-profitable arbitrage trade. But a trader that has a crypto arbitrage scanner stands a higher chance of seizing opportunities in small price discrepancies across various exchanges. Use the Algory crypto arbitrage scanner and detect a region’s real-time sentiment for high trading profit.