In many ways, crypto arbitrage is just like fiat or sports arbitrage. The main idea here is simple: you try to benefit from price differences for the same asset on different markets or exchanges.
If you need a definition, Investopedia describes arbitrage as “the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.”
Cryptocurrency price differentials can be substantial across exchanges. It presents traders with a legit opportunity to take advantage of price inconsistencies.
There are three distinct ways to do crypto arbitrage:
- Regular arbitrage, which refers to buying and selling the same digital assets on different exchanges with significant price differences.
- Triangular arbitrage, which involves price differences between three currencies on the same exchange. You try to take advantage of price differences through several conversions. For example, you buy BTC with USD, sell BTC to ETH, and convert ETH back to USD.
- Automated arbitrage. Some companies specialize in providing tools for automated crypto arbitrage. For example, one of the leaders in this niche is ArbiSmart, which provides a quick way to deposit funds, choose a plan, and reap the benefits of automated arbitrage trading.
While all approaches are legit can be profitable, it might be more challenging to discover opportunities for triangular arbitrage within the exchange. Conversely, large volume trading on the same exchange might qualify you for attractive fee discounts that can have a positive impact on your profits. By far the easiest way to do crypto arbitrage is by using third-party arbitrage software, but then you will have to pay special attention to your service provider and how much their services cost.