An example of a type of trading that involves taking advantage of the price differences between different cryptocurrencies is known as arbitrage. This method allows users to track the price differences between different types of assets. Unlike other types of trading, which require a huge amount of time and effort, cryptocurrency arbitrage bots are very profitable.
What is Cryptocurrency Arbitrage?
Cryptocurrency arbitrage is earnings on the difference in prices of digital assets. For example, Bitcoin (BTC) costs $10,000 on exchange #1. On another trading platform, the coin is traded at $10,300. You can profit by buying cryptocurrency on the first exchange and selling it on the second one. Such earnings on the difference in the bitcoin exchange rate can be easily projected onto other coins.
Each exchange considers the demand of its buyers for a digital asset. The price difference for the same coin on the market can be explained by the difference in supply and demand on trading platforms. In addition, other factors influence the price of a cryptocurrency. For example, the difference between the dollar exchange rate adopted by the exchange and the site’s status.
There are two types of arbitrage trading in crypto:
- Inter-exchange arbitrage (classic);
- Intra-exchange arbitrage (triangular).
This is a simple arbitrage where you buy one asset on one exchange and sell it on another simultaneously. He is described in the example above with the purchase of BTC tokens on Kraken and their sale on Binance. This approach is the most obvious since it is similar to fiat currency arbitrage in Forex and sports arbitrage, which most traders know.
Suppose you plan to earn in this way. In that case, when choosing software for cryptocurrency arbitrage, you need to remember that, in addition to the difference in rates, it must also track the commissions that need to be paid, namely, trading commissions and commissions for depositing/withdrawing funds on exchanges. These costs can be reduced if a certain amount of currency is deposited on exchanges in advance to ensure their liquidity.
This cryptocurrency arbitrage option involves buying one asset and transferring it to another, then transferring it back to the first asset. If the market is inefficient, such an operation can bring a small profit, which can be increased by repeating all the iterations several times while there is still an opportunity for arbitration (this is already polygonal cryptocurrency arbitrage).
This approach is more complicated since, here, it is necessary to link the rates of several assets at once and, at the same time, take into account the probability of a decrease in profitability with each subsequent polygonal cycle. And that means traders should be careful and take their time to measure risk/reward properly.
However, if a trader stays within the same crypto exchange and repeatedly applies the same polygonal approach to different cryptocurrencies, the need to pay fees for depositing/withdrawing cryptocurrencies is eliminated.
Crypto Arbitrage Trading Strategies
Cryptocurrency arbitrage is a plastic kind of work, and each user can customize it for themselves using different trading strategies. Popular ones include the following:
- Simple arbitrage. The task is to buy a specific asset cheaper on one exchange and sell it at a higher price on another trading platform. You can monitor the arbitrage of cryptocurrencies by comparing the costs of crypto exchanges.
- Scheme with conversion. In some cases, when buying a coin, income can be increased through its preliminary transfer to another asset. This trading strategy can be applied when an arbitrage specialist has an opportunity to earn on the conversion of assets within the exchange. Example: $10,000 can buy 1 BTC. 1 BTC equals 42786 XRP. 42786 XRP, in turn, due to the difference in rates, may cost more than the initially invested $10,000. More cryptocurrencies may participate in the scheme.
- Work with exchange deposits. In addition to creating accounts on different platforms, you will need to make deposits to secure your assets. When the price of a cryptocurrency goes up and down, you need to operate to determine which exchange is cheaper and which one is higher. This involves buying and selling at a lower price while keeping the higher rate.
Circuits can be used in parallel. Understanding trading strategies allows you to use the best option depending on specific conditions.
How Do Crypto Arbitrage Trading Bots Work
Earnings on the difference in cryptocurrency rates can be automated. For this purpose, many traders use special programs – robots. For those who want to arbitrage cryptocurrencies, a bot is, among other things, a way to increase the speed of operations and reduce the percentage of lost profits.
A crypto arbitrage bot is a set of instructions that can be used to execute a trade without the need for human intervention. It has various components that can be used in different ways.
One of the main advantages of using an algorithm is that it can repeatedly perform the same strategy. This eliminates the need for a human to implement the same strategy manually. Unlike other forms of trading, which require a lot of time and effort, crypto arbitrage bots are very profitable.
How To Choose A Crypto Trading Bot
There are some crucial moments you need to consider before choosing a crypto arbitrage bot.
Security of funds. The software that runs a crypto arbitrage bot will require the keys to your accounts and wallets on exchanges to perform its trade. If the data gets stolen, your funds will be lost, and you will be unable to recover them.
Integration with exchanges. One of the most important factors that a good crypto bot should consider when developing an arbitrage bot is its integration with major exchanges. This will allow it to find conditions that are favorable for its trade. Some of the prominent platforms that are associated with the Bitsgap bot include Coinbase, Bitfinex, and Binance.
Price, fees, and commissions. The cost of software and transactions is another essential criterion when choosing software for cryptocurrency arbitrage. So try to find an app that won’t charge you too much for downloading and using the arbitrage functionality.
Ease of use. There are many advantages to using cryptocurrency arbitrage software, such as various features and training for professional and beginner traders. However, it is also very complex to use and requires many skills to customize. For instance, a trader will need to learn how to program Bitcoin Blackbird Arbitrage to meet their needs.
Application community. One should also consider the past and current users of the software when choosing cryptocurrency arbitrage software. This is because the number of people using the software will often tell you if it is reliable and secure. Also, the size of the community can help you resolve any issues with the software. For instance, the number of people who use the Cryptohopper Facebook page is 5,000, while the number of people who use the Bitsgap Telegram channel is 2,100.
Software/connection speed. Usually, the difference in the price of the same asset on different exchanges persists for several seconds or even fractions of a second. Therefore, the arbitrage software must be fast enough to find such a difference and have time to complete the necessary transactions. In addition, you also need to be aware of other traders (bots) who can find the exchange rate difference and conduct arbitrage operations faster, which will eliminate this exchange rate difference and deprive you of the opportunity to earn.
Update frequency. The cryptocurrency market is a dynamic industry where the code of blockchains, exchanges, wallets, smart contracts, and APIs is updated very quickly. Therefore arbitrage bots must also be updated frequently to keep up with all these changes. Otherwise, the bot may become incompatible with the exchange API, show incorrect rate and commission data, or become insecure (vulnerable to hacking).
Crypto trading bots are useful for making processes automated and easing profit earnings. Exio.Tech can help you have your crypto arbitrage trading bot and start having income from the crypto market. Contact us, and our experts will give you the complete information you need.