5 Myths About Crypto Arbitrage
Considered a lucrative investment segment, crypto trading has a special attraction despite being banned in 42 countries. Users of Binance, one of the largest crypto exchanges, trade crypto worth $14.39 billion daily, as per CoinMarketCap data. Although the sector is profitable, the cryptocurrency market is known for its volatility.
Hence, trading cryptocurrencies requires special skills and knowledge of the market. A better understanding of what blockchain technology entails will enable better outcomes. Another way is to get help from some of the top blockchain development companies that ensure the process is seamless and profitable.
Arbitrage is an exception to the consensus on crypto trading as many consider it a low-risk approach that needs only the bare minimum trading knowledge.
But is it as simple as people assume it to be? Here is a detailed account of what crypto arbitrage entails, the myths surrounding it, and its true potential.
What is Crypto Arbitrage?
Crypto Arbitrage is the term given to the transaction that involves cashing in on the difference in price values of a crypto asset on different exchanges or markets.
It is a method wherein an individual buys a crypto asset from an exchange and sells it on another platform nearly at the same time as the price is higher in the latter.
Many types of arbitrage exist based on the working method and the factors involved.
Main Forms of the Crypto Arbitrage Strategy
Here are four main forms of the strategy:
1. Inter/cross-platform
This is the basic type where a trader buys in one exchange and sells the asset in another. Due to real-time price fluctuations, making a profit is impossible if you buy from one and transfer the assets to another platform to sell.
But a profit is possible if the trader has assets in the two exchanges so they can buy and sell simultaneously. Transaction fees can be avoided with this method.
2. Statistical
Mathematical techniques are utilized for the process, and most often, arbitrage software is used. Mathematical probability is employed for assessing the profits or losses in a deal. Due to the presence of automation, this form is considered less risky.
3. Spatial
The geographical location of the exchange plays a key role in this form of trading. The demand for the asset is the main deciding factor. The difference between the inter-platform and spatial types is that here trading does not occur with prices in real-time.
A trader can manually purchase from a platform in one location where the price is low and sell it on another exchange in a different location where the price is high and make a profit.
4. Triangular
This form of trading is done with three assets, hence the name triangular. The transactions are done in one exchange. For instance, if a person is holding Ethereum, Dogecoin, and Bitcoin, and two of the three are undervalued compared to the other, the difference can be used to profit. Since only one exchange is involved, there are no deposit, transfer, or withdrawal fees.
At the outset, the process looks simple enough without much risk. Further, you need not have to be savvy in the process or have a sophisticated setting to conduct the trading. But this is not true. Here are some common myths about arbitrage trading and the facts.
5 Myths about crypto arbitrage
Myth #1: The lack of regulation makes it a hassle-free strategy
The main attraction in using digital assets for investment and other financial purposes is the way it is governed and maintained.
The miners or developers of the digital asset keep track of the transactions and get remunerated for the process.
The personal involvement of the creators ensures the records are updated and precise. Thus, the integrity of the currency is protected, and the records remain decentralized.
The advantages include faster and cheaper transfers. Further, the system does not collapse if there is a failure at any point in the process.
The facts
However, the fact to remember is that there are a few people who wield control over the flow and volume. There is the risk of manipulation and huge swings in the price.
The absence of a single global regulatory system controlling the transfers worldwide is a source of big concern.
There are regulatory gaps, and no proper standardized arbitrage method is present.
The above factors reveal the danger that crypto arbitrage can present.
Myth #2: Flexible trading advantage
The core principle of crypto arbitrage is that a trader gains from the difference in price between exchanges. The process is considered a low-risk deal that can work in all types of volatility situations.
Traders get to benefit from a low or highly volatile market. However, the profits gained are not big. It is necessary to trade frequently to achieve big gains.
The facts
Further, there are other factors like the exchange chosen. Here are some of the facts:
1. A trader can choose a centralized exchange (CEX) like Binance. It offers perks like convenience, user-friendly processes, and diverse options for trading. But the drawback here is that the fees are higher when compared to other types of exchanges.
2. The DEX (Decentralized Exchange) offers direct control without an intermediary, like a CEX. Smart contracts and liquidity pools enable an easy and less expensive process. But there is a drawback here too. A trader is in full charge of the entire transaction, which is not easy for a novice.
Another drawback is that miners and other stakeholders can capitalize on the transaction information to profit from them.
3. With the hybrid exchanges, the benefits of CEX and DEX are combined. The transactions are fast and secure. They involve less expense. However, the concept is still new and not fully regularized, so caution is necessary for using this format.
Myth #3: Crypto arbitrage provides more profits at lesser risk
Due to the short period involved in the arbitrage process, the risk is minimal. Even in high market volatility situations, the process takes just a few minutes.
The short span leaves little room for alteration in price. However, the system’s success depends on how fast the transactions are.
In other crypto investment strategies, the market liquidity is sustained for a longer span. Due to the highly volatile market, the chances of changes for the worse are higher.
The facts
While the risk is minimal, the method incurs expenses in the form of depositing, withdrawing, and even trading charges. So, even if you make a sizeable profit, the expenses will reduce the profits considerably.
One solution to this problem is to choose platforms that levy low fees. Another way out is depositing funds on many exchanges. By reshuffling the portfolios, it is possible to benefit from the market changes.
For instance, if a trader notices a difference in BTC price in Binance and Coinbase and wants to profit from the variation, then instead of transferring funds between the platforms, the trader sells the BTC in Coinbase, for say, $45,200 and buys it for $45000 on Binance.
The profit gained here is $200, and there are no withdrawal or deposit fees here, with just the trading fee to consider, which is negligible mostly. In most exchanges, the transaction fees are low when you trade high volumes of crypto.
Myth #4: Ideal for newbies and experts
Unlike day trading, arbitrage does not require a trader to have technical knowledge. The lack of predictive analysis and short span are great advantages that experts and newbies capitalize on.
Based on the available resources, it is easy to complete a trade in a few minutes or even seconds. The above benefits make the strategy seem ideal for all traders. But this is not true.
The facts
Due to the possibility of high profits, traders the amount of funds involved is huge. Hence, this makes the method prone to high-security risk. Scams and hacks are more common. Many forms of scams exist like
Traders are duped by scammers who inflate prices artificially by feeding fake news. This results in a big rush to sell assets at a huge profit. The trader who buys last is scammed, as the fraudsters would have taken off with the loot.
Many companies carry out exit scams when they suddenly stop operations and flee with traders’ funds.
The right way to practice the strategy is to be aware of the security issues. A proper evaluation of the market and the exchange chosen is necessary. It is also best to choose reputed platforms to avoid scams and hacks.
Some exchanges have a complicated approval process that can make the entire trading futile. Many traders have complained about their deposits being stuck in an exchange or the delay in approval.
Myth #5: Profits can be gained quickly with crypto arbitrage
A major benefit of the trading strategy is that a trader need not use a market sentiment or other predictive analytic methods to generate returns.
The key factor at play here is generating a fixed amount of profit in the quickest time. Some of the trades get done in a few minutes or even seconds. The low span is a significant influencing factor in minimizing the risk present.
The facts
Crypto arbitrage is completely dependent on time. When more traders are using it, the price variation can reduce.
For instance, consider two traders, A and B. If trader A buys BTC for $50,000 on Binance and makes a profit by selling it for $50,020 on Coinbase, trader B may not get a similar profit. Due to the volatile nature of the sector, trader B makes a profit of $15 from the trading. This narrowing of price margin can increase, resulting in the trading giving no profit at all.
Key Influencing Factors for Achieving Profit
The main influencing factors for achieving profit in the process are:
Factor #1: Blockchain speed
Time is vital to make profits in this strategy. Due to the need for transactions to occur between exchanges, the validation time must be considered.
For instance, BTC transactions can take 10 minutes to 60 minutes for confirmation. During the waiting time, changes in market conditions can occur.
So, you need to choose blockchains with fast transaction speeds or networks that are not affected by overcrowding.
Factor #2: AML verification
Anti-money laundering verification is mandatory when there is a huge sum traded. The issues with such verifications are that they take many weeks to complete.
To avoid a prolonged delay, a trader should look into the verification process and the time taken by an exchange before choosing it.
Factor #3: Outages
Sometimes exchanges go offline due to some technical or server error. Or they may impose restrictions on the deposit and withdrawal limits without any specific reason. In such cases, using crypto arbitrage is not possible.
Is crypto arbitrage a viable option?
After going through the above myths and facts about crypto arbitrage, it will be clear that the process is not as easy or hassle-free as many opine.
The small profits, frequent trading, and drawbacks mentioned above reveal that the approach needs to be used with caution.
While the profit potential is present, and some traders can benefit by exploiting the price movements, the influencing factors can make profit viability difficult.
The lack of regulation in the exchanges can put your asset at risk as there is the possibility of holding or outright stealing. With reputed and regulated exchanges, the process can take time, making it impossible to exploit the price movement.
Manual Trading vs. Automation in Crypto Arbitrage Business
Manual trading
For a successful outcome, it is necessary to know which platforms are best for trading. Further, you need to have some experience in the process for you to grab opportunities when they arise.
To enable this, you need to know the market properly. In short, manual trading requires plenty of patience and constant tracking of the market.
Automation
Using a programmed bot for the process is a viable alternative. You need not closely monitor the changes or keep looking for opportunities, as the bot does the work for you 24/7.
The bots keep track of the prices on the different platforms, identify discrepancies in price, and help in deciding the advantageous trades.
However, the software you use should be specifically programmed for it to work effectively. It may also not provide the profits you expect due to technical reasons.
You stand to lose a big chunk of your asset if you are not careful in choosing the right software. Free bots are available, but they may not be as effective as the paid version.
While a paid bot does not guarantee you success, professionally created software has better chances of positive outcomes.
What are the risks associated with using bots?
There are a few risks in using software programs. They include:
- Most software tools offer only minimal returns even if they function properly.
- Many of the bots are not developed properly and do not have proper regulations.
- Adequate knowledge of the markets and a proper investment plan are necessary.
While some traders may find the software programs useful, for many, they are not of any use. This is because it takes time to know the working of the bot, and by that time, the trader may not need the bot.
Tips for selecting a crypto arbitrage platform in 2023
Online platforms are numerous, but not all are equal. They differ in the approach they use and their affordability. Quality is another key factor that has to be considered. Safety is another deciding factor, as sensitive info like account details and wallet keys have to be shared. Some tips in the selection are
- Open-source programs are preferred by many traders as it is more reliable than other formats.
- A solid and huge community is proof of the safety, quality, and effectiveness of the application.
- Avoid platforms that do not have security audits.
- Read the online reviews to verify the reputation, support, and effectiveness.
- The automatic withdrawal feature in the program that a trader has to allow access to should be easy to disable.
- Choosing a user-friendly platform enables proper utilization of the tools, ensuring better results.
- Since speed is paramount in crypto arbitrage, choosing a bot that is quick to identify and execute trades is vital.
- Choosing a program that offers a monthly subscription is preferred to a bot that charges a single upfront payment.
Final thoughts
Crypto arbitrage promises a reasonable profit potential, provided one has the basic know-how. Contrary to popular belief that it is a quick profit-making approach, there are associated drawbacks that a crypto trader should be aware of.
One key influencing factor in making the strategy a success is understanding the technical aspects, which is the ability to spot and execute trades in the shortest span.
While manual operations are effective, you should use a software program or bot that is customized to carry out instructions at a set price limit to get better outcomes. It also decreases the vulnerabilities in the process and enhances the profit potential.
