08.02.2023

Crypto Arbitrage: Alternative investment strategy

Over the past five years, the market capitalization of the main cryptocurrency has jumped from $ 7.5 billion to $ 910 billion.In December 2017, Bitcoin futures were added to the quotation lists of the three largest US trading floors – NASDAQ, CME and CMOE. And more traditional funds are waiting for their Bitcoin ETF approval from the SEC. The coin became widespread.

The demand for speculative transactions with bitcoin has sharply increased, and it has also become a catalyst for the emergence of hundreds of large and small cryptocurrency exchanges. A huge number of them, as well as a significant spread in the values ​​of bitcoin liquidity at different sites – lead to a natural difference in rates and create a comfortable environment for using arbitrage algorithms.

What is arbitrage?

In a nutshell, arbitrage is a profit-making strategy based on price differences between markets. They arise for various reasons. So, for example, at one point in time, the price of the same asset traded on the Toronto Stock Exchange and the New York NYSE may differ by several points.

The main principle of arbitration is to buy at a lower price and sell at a higher price. In financial markets, it is quite difficult to perform such an operation manually. Therefore, traders resort to the services of specialized algorithmic systems that independently find trading opportunities and conduct an arbitrage deal within a few fractions of a second.

Arbitrage in the cryptocurrency market

The number of exchanges and exchangers offering services for bitcoin speculation is more than a hundred. The range of prices for them is huge. The difference, on average, is several tens of dollars. Below are five-minute charts of the BTC / USD pair on two platforms: BitFinex and OkCoin.

Even a cursory analysis shows how differently prices behave in the same period of time. A paradise for arbitration! Having a sufficient amount of funds on both exchanges, during the day, you can conduct more than a dozen successful arbitrage transactions.

However, in order to ensure the actual profit, some nuances must be taken into account.

1️⃣ Commission for purchase / sale or exchange operations on cryptocurrency platforms reaches 0.5% of the transaction volume. When calculating the profitability, this factor must be taken into account.

2️⃣ In addition to trading rewards, the exchange charges a fee for withdrawing funds from an account. Its size varies. It can be fixed, or it can depend on the volume of the transaction.

How to Take Advantage of Crypto Arbitrage Algorithmically

Due to its specific nature, arbitrage transactions with bitcoin are not carried out manually. It’s almost impossible. In their work, traders use special software products – arbitrage trading robots, the code of which is optimized for the conditions of cryptocurrency markets.

These algorithms are able to independently analyze all trading platforms, calculate the difference in buy / sell prices and conclude deals, within a few nanoseconds after identifying a trading opportunity.

Bitcoin arbitrage is different in that the income from it does not depend on the fall or rise of the coin. As long as there is demand, and there are hundreds of exchanges and exchange offices operating on the market, arbitrage algorithms will bring profit to their owners.

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