Crypto Arbitrage Investing [Ultimate Beginners Guide]

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by Jack Brewer

Updated

Cryptocurrency is transforming how the world thinks about money. As millions buy into this decentralized form of currency, savvy investors discovered an opportunity to capitalize on this new asset.

In this article, we cover crypto arbitrage investing from A to Z, and walkthrough exactly how you can get in on the action.

What is cryptocurrency?

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Cryptocurrency is a growing form of digital payment used to buy and sell goods and services.

Many companies have developed their own currencies, referred to commonly as tokens that can be traded for goods or services provided by said company. It is essentially a subformat of currency, similar to chips in a casino or tokens in an arcade.

Cryptocurrencies function by using blockchain technology. This technology is decentralized, which means it is spread over multiple computers that manage and record transactions. A large part of the appeal behind the cryptocurrency is the security it offers.

What is cryptocurrency arbitrage?

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Arbitrage is a concept that has been around since foreign markets, bonds, and stocks were first introduced. It is the concept of buying and selling an asset on multiple markets to make a profit from the difference between listed prices across the different exchanges.

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Crypto arbitrage is therefore the method of applying this concept to crypto banking, or trading with cryptocurrency with the intent to make financial gain through an exchange.

Data analysis and money management skills are not only vital for crypto arbitrage success but also high income skills in the job market.

Is crypto arbitrage legal?

Cryptocurrency arbitrage is absolutely legal. Each exchange has a specific rate for each cryptocurrency available. Pricing is roughly the same with each exchange, but occasionally there is a difference of 5% to even 20% between exchanges.

Considering cryptocurrencies are volatile and decentralized in nature, opportunities for arbitrage appear more often than in other more traditional markets.

How do you make money with crypto arbitrage?

The way this process works is by researching coin prices on popular exchanges. Let’s use bitcoin (BTC) as an example. As with all cryptocurrencies, BTC is available for purchase through online mediums. You can buy this asset through platforms like: Zipmex, Coinbase, and Indodax.

Imagine BTC is priced at 52,000 on Coinbase, and then you see that it’s priced at 51,950 on Binance.

As a result, you decide to buy bitcoin on Binance and sell it on Coinbase and make $50 dollars profit since it is available at a higher price on the secondary trading exchange, you can profit from the transfer of currency between platforms.

Trend on the Rise:

The largest crypto marketplaces continue to be CoinBase and Kraken. Using a trusted marketplace is a must in the crypto space.

Persistence and fast action are keys to success when using this method in the crypto world. The market can start moving in a positive or negative direction once your cryptocurrency purchase is validated. Transaction fees must also be considered, since they may add up against your profit margin.

The 4 Methods of Crypto Arbitrage

There are two popular methods of crypto arbitrage being used today, which are: arbitrage between exchanges (triangular arbitrage), and arbitrage within 1 exchange.

  1. The 1 exchange method involves buying two different cryptocurrencies from the same exchange, and then selling when there is a difference in price. You must take a risk/reward ratio into consideration during this process.
  2. Triangular Arbitrage (multiple exchanges) is designed to take advantage of price differences on different exchanges. Besides these common methods, there are two more options to consider.
  3. The Cross-Border Arbitrage method involves two exchanges based in different countries. You can mix cross-border arbitrage with triangular arbitrage method, to introduce more price differences as well.
  4. The more difficult form of arbitrage is called Statistical Arbitrage, which involves mathematical modeling to predict currency pricing.

What to consider about Crypto Arbitrage as a beginner?

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To be successful, you must also be aware of common pitfalls people face when attempting crypto arbitrage. You want to keep an eye out for coins with the same name, as there are thousands of cryptocurrency tokens available – many of which share similar names.

Similar names mean similar ticker symbols like $HNC (Huncoin) and $HNC (Hellencoin). Sometimes exchange wallets go offline, and sometimes cryptocurrencies move from one blockchain to another. Make sure that exchanges you use provide you the same block token.

When purchasing crypto coins, you should consider geographical location as well. Some purchases can be delayed based on the time of day (which will vary based on time zones). It can also take 15-20 minutes for major coins to confirm transactions.

Some investors wait days to perform a worthy arbitrage. You want to avoid situations where you buy a cryptocurrency, and cannot continue to sell it for arbitrage – commonly known as a single-side trade.

In the age of the internet, there are other new forms of investing out there such making money with eBay and even digital art.

Crypto Arbitrage Pros

Crypto arbitrage can be very profitable, and that becomes clear when observing small details behind the concept.

If you move fast and all goes according to your plan, quick profits are possible. You have a large set of options with more than 200 exchanges available to buy and sell cryptocurrencies, opening the doors to plenty of opportunities.

It might not seem like a positive, but high market volatility in the crypto space enables the lucrative investment opportunities.

In addition to market volatility, there is also less competition from seasoned traders than more traditional currency investments. A large part of the appeal behind cryptocurrency is the security it offers while being stored online and encrypted.

Crypto Arbitrage Cons

Some currencies fluctuate more often than expected, and prices can change much faster than expected occasionally.

Every method has its differences, but some things that are always worth considering are fees when buying and selling – commonly in the form of transaction commissions and withdrawal fees.

Another factor to think about while attempting to trade coins or use crypto arbitrage techniques is taxes and regulations.

Interesting Facts about Crypto Arbitrage Investing

  1. Investors gravitate to this investment technique, because of its high volatility. It is not unusual for the price of a cryptocurrency to fluctuate over 10% during a single day.
  2. There are now more than 1,500 cryptocurrencies available to trade. Though fiat currency markets (government currencies) rarely move more than 1% a day, cryptocurrency prices sometimes double overnight.
  3. According to NerdWallet, the total value of all cryptocurrencies is more than $1.6 trillion, as of early 2021. CoinMarketCap reported that $969.6 billion is in the form of bitcoin.

Best Crypto Exchanges of 2021

  • Coinbase
  • eToro
  • Binance

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About the Author

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Jack Brewer is passionate about all things personal finance, and enjoys testing out new side hustles and investing strategies.