Sep 03, · Cryptocurrency arbitrage is one of the money-making options. The idea of the arbitrage lies in benefiting from market inefficiencies. If there is a difference in the price of one asset on different exchanges, a trader can profit from buying and selling it in different markets. The difference in rates will become a trader’s 24crypto.de: Mikhail Goryunov. Jun 20, · Bitcoin and cryptocurrency arbitrage has changed a lot over the years. As more trading bots and institutions try their hand at arbitrage, so does the strategy to try and capitalize on profitable arbitrage opportunities. Arbitrage table just displays the price difference between last trades. It ignores any fees associated with exchanges and market depths.
Bitcoin markets arbitrageBitcoin Arbitrage and Trading Strategies into the Crypto Market
The study identifies two main causes of the premium; capital controls and friction caused by the Bitcoin network itself transaction speed and fees. This type of arbitrage is likely a lot more difficult to exploit.
It would come down to knowing the more intricate details of the financial system in your area. With that said, the study concluded that cryptocurrency arbitrage is not likely possible. At least arbitrage on the Kimchi premium:. If one of the other crypto currencies had no premium or a lower premium than Bitcoin arbitrageurs could use that currency to move funds out of Korea and complete the arbitrage.
Despite this, there are plenty of traders in all kinds of markets who claim to make a profit out of arbitrage strategies. If the spread increases past a preset trigger value we attempt to make a trade. The trigger value should be some specific number, ideally derived from some kind of risk analysis that takes into account market volatility, exchange fees, past trade attempts, etc.
Most arbitrage strategies require holding sums of both assets on both markets and simultaneously buying and selling respectively. The reasoning here is that it is a risk-free trade because it happens nearly instantly.
However in the case of cryptocurrency, you can argue that this would not be risk-free. This is because cryptocurrencies are so volatile. Holding them indefinitely during trading time waiting for arbitrage opportunities could offset trading profits by a substantial margin. So in outlining our strategy here, we will use more of the typical spatial arbitrage. This involves actually sending the asset from one market to another.
With the information here you could adapt it to be one of the other types of strategies to your liking. It will be logistically unlikely that you will be able to have a very profitable trading strategy of any kind without writing some scripts or bots. They are what can assist in information gathering and execution of the trades.
This is especially true with arbitrage since you need to make the trades as fast as possible. So if you are serious about it, it is advisable to learn how to program or use advanced pre-made trading software. Aside from the normal arbitrage conditions stated earlier, with cryptocurrency trading , we will need an additional set of criteria and heuristics.
One of the most common sources for price data is CoinMarketCap. It is one of the first exchange prices aggregating websites in crypto and has over crypto assets listed. However, the free version has limited functionality. Lucky for us, it has well-maintained API wrappers in several languages. Or to follow along, you can go to coinmarketcap. It should look something like this.
Here is a short script containing only 3 functions that use the Coingecko API. What it does is essentially the same thing that we would have to do manually if we were searching for arbitrage opportunities in the markets. It checks all the markets for a given coin or token. Next, it takes the highest price and lowest price, finds the absolute difference, and returns that as a percentage. The bigger the spread the more profit potential because the spread is your profit minus trading and transaction fees.
Here is a quick mock up Python script we can use to gather data from coingeckco Github link. So we will have to manually check these pairs. No way! This may explain why there was such a large spread. And also why no one had exploited this opportunity already. Perhaps markets are efficient and the difference in prices on the two exchanges was simply the discounted, risk-adjusted cost. Often when a coin on an exchange has its wallets disabled, the market can view it as a risk because it could be happening for a number of reasons ranging from exchange insolvency, a hack of the blockchain or token, or a simple technical issue.
That is if the wallet got reactivated shortly. Market volatility could easily wipe out these gains if you had to wait days or even hours. I found a few other examples of a large spread which also happened to have wallets that were in maintenance mode.
So this seems to be a common false positive that we should look out for. However, if you are a risk taker, maybe it could also be an opportunity to profit as the price should correct as soon as the wallets go out of maintenance mode.
So it appears that simply taking the spot price might be insufficient. I spent some time looking for opportunities based purely on the spot prices and they were few and far between. I suspect most of the time there were similar issues with the trade that might not be immediately obvious until you actually try to execute it.
For instance, such as transaction time or risk similar to that we see in other markets with large price differences, such as the Korea cryptocurrency markets I mentioned earlier. We are going to first look for arbitrage opportunities within an exchange between an asset with several pairs. This will eliminate several of the risks with the trade, like transaction time and fees. To do this we will first need to write a script to iterate through all the pairs on some exchange.
In this example, we will use the public Bittrex API. Our script will not only iterate , but also produce some graphs. Here is one output graph from our new script Github code. This shows us the prices converted to USD of the different pairs. On the bottom of the graph in orange you can see the size of the price difference. This could then cause the markets to have differences in efficiency, leaving us with opportunities for arbitrage. The graph also gives us a percentage of the average spread right beside the currencies name at the bottom.
Here is a graph with the highest spread out of all the pairs our script analyzes. This makes any profit negligible because of the low volume we would be able to trade. But at scale, it might be profitable more on that later on. On Bittrex, trading fees are 0. Because it would take us 3 trades to successfully execute this type of arbitrage, the spread would, therefore, need to be greater than 0. But our profit would probably be a lot less than that due to market volatility and other risks.
Virtually all the pairs with an average spread greater than 0. Currently, there are about 40 pairs with a large enough spread to potentially cover our trading fees. Maybe no-arbitrage is right and there is no free lunch.
However arbitrage does still appear to be possible, just very very unprofitable. Instead of trading solely Bittrex pairs, we will adapt our script to find the biggest spread between Bittrex and Binance. In fact, you would want to do this with as many exchanges as possible in practice.
Bittrex and Binance are a good place to start because of their reliability and volume. Github code. Ethereum classic has a large spread at times, so this is just one of the pairs that our script produces. My first inter-exchange attempt I saw a large spread with Zcoin. I bought it on Bittrex and then quickly sent it to Binance. Turns out it took 90 minutes to confirm the deposit. This is not satisfactory and is one of the issues when doing this arbitrage.
So I tried a different cryptocurrency, a fast one; Stellar Lumens. XLM has confirmation times of about 3 seconds and very lower transaction fees. This was the first successful arbitrage attempt. Although there was a big catch. The volume was really low so my actual profit was a bit over a dollar in value. In fact, this is quite a lot of profit and makes things look much more promising for arbitrage being possible and profitable. Mostly because of the fact that this is scalable.
It might even be possible to do cryptocurrency aribtrage with hundreds of pairs at the same time. It just would take some overhead in developing all of the API interfaces and code.
However, I would still be skeptical about how profitable this is in the long term. Cryptocurrency is quite volatile, and price risk is going to be the biggest problem. Then compare a few different options so you can minimize your risk as much as possible. Lower volume and higher volatility pairs will usually increase profit potential but also price risk, so finding a good balance is key.
More than likely, even if you are trying any of the various other arbitrage strategies, you will likely need to follow the basic steps outlined here. It will probably need some form of automation to be profitable.
That is a lot of capital at risk for a small profit. Secondly, trading fees and transaction fees will reduce your profits. Most bitcoin exchanges charge fees per trade executed, usually 0. Exchanges also charge withdrawal fees, which need to be taken into account. So, each arbitrage trade needs to generate more profit than the attached transaction fees you incur on both exchanges.
In the above-mentioned example, the profit equates to around 1 percent of the capital at risk but now the 0. Thirdly, storing large amounts of bitcoins on exchanges is never a good idea since bitcoin exchanges are regularly targeted by hackers who try to steal digital currency deposited on exchanges. This makes bitcoin arbitrage a rather risky venture. For these three reasons, bitcoin arbitrage is not a recommended investment strategy.
The risk-free aspect of making arbitrage trading profits are not so risk-free at all when trading bitcoin. The bitcoin trading ecosystem is simply not developed enough for quick and easy arbitrage profits to be made.
Furthermore, this strategy involves constant monitoring of bitcoin prices and is, therefore, not suitable for everyday investors who do not have the time to stare at a computer screen all day. The simple buy and hold approach to bitcoin investing is much easier and will most likely also be more profitable in the long run.
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