Exchange Arbitrage: If it’s easy, why do so few people do it?
Imagine that the most wonderful time of the year has just arrived — vacation time. You’re packing all your summer clothes in your luggage to board a 10-hour flight that will take you to a hidden tropical paradise. Once you’re settled in, you begin to realiыe how cheap surfboards are compared to your hometown. Then dollar signs appear in your eyes.
You’ve just come up with a brilliant idea, it’s called Arbitrage.
You come up with a business model: buy surfboards in bulk in that cheap tropical paradise and sell them in your expensive city. After subtracting shipping and other costs, you know what your potential profit is. Finally, you launch your surfboard making machine and let your new surfboard business make money for you.
However, transporting your surfboard from point A to point B, filling out all the necessary paperwork, finding potential customers, etc., etc. — is something that will take up your time.
And if you already have a full-time job, it becomes a mission: Impossible.
This great arbitrage opportunity is largely sabotaged by endless costs. Arbitrage opportunities are usually threatened by high commissions, delays, and other unforeseen factors.
But there is an exception: trading.
Buying a stock or a commodity from your laptop via your preferred broker will only cost you a very small commission. But there is a downside: these assets are so liquid that arbitrage opportunities are very scarce, hard to find, or not profitable enough.
But then again, there is another exception: Cryptocurrencies.
Bitcoin, Ethereum and other cryptocurrencies have shown significant price differences on various exchanges since their inception, and many traders have taken advantage of this phenomenon. Many of them started spreading the word, and arbitrage in crypto trading itself became a style of trading.
Buy cheap on exchange A and sell at a profit on exchange B. But not only that — while people using this trading technique began to accumulate their profits in Bitcoin, the price of BTC also increased. Thus, the real profit in fiat money was off the charts.
How big is the difference in price on different exchanges?
The price difference between crypto exchanges depends mainly on two factors: volume and volatility. Why? Stable and nonvolatile markets usually converge at the same point. However, when volume begins to flood the market, large waves form and prices do not rise and fall at the same rate, which creates price differences and opportunities for arbitrage. But of course, simply adding volume won’t make the price change, we need volatility to make those differences even more significant and profitable for us.
In the following table we will analyse the price of bitcoin on 8 different exchanges.
This table shows the price difference for the most liquid cryptocurrency market pair, BTC/USD(T). Depending on the volatility and liquidity of the market, the arbitrage opportunities are larger or smaller. If you take less liquid pairs, such as any altcoin/BTC pair, the arbitrage opportunities are more obvious and easier to trade.
As you can see, on some exchanges the price difference is not big enough to even cover trading fees. But on other exchanges, an arbitrage strategy will increase your portfolio. As more capital and liquidity enters the market every day, identifying the exchanges that typically offer the most arbitrage opportunities is key to creating a consistently profitable arbitrage strategy.
As the crypto industry evolves, markets inevitably become more liquid and there are fewer arbitrage opportunities. However, when sufficient volatility emerges, it shakes up the cryptocurrency markets and creates price discrepancies on exchanges in many trading pairs. Creating alerts that notify you when whales enter the market will make it easier to detect these price discrepancies.
Paper Trading on different exchanges can be a very good way to identify the best exchanges for arbitrage. But not only that — the speed of trading is something crucial in this trading practice.
Arbitrage opportunities are like gems: once they are spotted, they don’t stay on the market for long. This is why an average person is powerless against the machine. A computer will detect these rare opportunities faster than you 99.99% of the time.
From manual to automated arbitrage
After this lucrative style of trading became better known, more and more traders began to follow the price of multiple cryptocurrencies on various exchanges. What did this mean for arbitrage trading? Opportunities began to appear on the market less and less frequently. Those who recognised an opportunity and pulled the trigger faster than others were rewarded. It got to the point where only professional trading departments with automated systems received such rewards. Manual traders could no longer benefit from this style of trading.
However, this is a thing of the past. You don’t need to be a professional trader to take advantage of this way of trading. Arbitrage crypto traders have quickly moved from manual to automated methods, and with an automated trading platform such as Intelfin, anyone can start earning from an arbitrage strategy that will scan the market 24/7.
Traders have been relentlessly searching for new tools that would allow them to cover more markets and trade longer without having to devote more time to actual trading, and technology has made that possible.
In the cryptocurrency markets, this shift toward more automated strategies began in 2017. The market became so bullish that the industry quickly began to innovate, and crypto traders began automating some aspects of their trading with tools like trailing stop-loss. This continued to evolve to the point where even full arbitrage strategies could be easily automated by anyone.
Is automation the solution? In such a competitive environment, we are more inclined to answer in the affirmative. However, it is difficult to imagine that a computer can account for all market factors. There are aspects of trading that are very difficult to code, such as support, resistance or micro-trends. Nevertheless, in arbitrage, only price needs to be taken into account.
Only price differences in different markets and nothing else — a situation in which an arbitrage bot controlled by hybrid intelligence will be in its element. With the right strategy in place, the arbitrage bot will handle any market inefficiencies in less than an instant.
Although the general idea is simple, the chance to make a lot of money is usually not that common.
You need to be able to monitor markets quickly and capitalise on price changes. The manual approach to monitoring markets for arbitrage is too time consuming and impractical in many ways.
Intelfin makes it easy to profit from arbitrage trading.
Thanks to an automated system based on artificial intelligence, you can start investing in just one click!
The best of all worlds is Intelfin!
Our automated system minimises risk by scanning over 20 cryptocurrency exchanges simultaneously, evaluating spreads and finding the best price at any given moment to buy or sell digital currency.
Sign up now and discover a new universe of crypto-arbitrage!