Cryptocurrency Arbitrage in 2020: Manual and Automated Approaches

26 min read

Introduction:

Within the financial markets, arbitrage trade opportunities are more than plentiful since the emergence and wide-scale adoption of over-the-counter trading.

The art of simultaneously purchasing and selling an asset or financial instrument to net near risk-free profits from exploiting price inefficiencies can be considered the epitome of trading, which not only continues to hold true in this modern age of technological innovation but more importantly has become more accessible for all traders. 

While it’s true that arbitrage trading has become more difficult to pull off due to the long strides made with technological advancements, the fact of the matter is that arbitrage trading is not only more accessible but will continue to exist as a byproduct of exploitable pricing inconsistencies since no financial markets are perfect and inefficiencies are bound to occur. 

To deepen the well of this truth, cryptocurrency arbitrage is also picking up steam. 

Also involving the simultaneous trading of cryptocurrencies, crypto arbitrage trading occurs by exploiting the price differences between two platforms.

While manual arbitrage trading is more feasible within the crypto realm, automated crypto arbitrage and crypto arbitrage signals have become more mainstream and sought-after by crypto enthusiasts. 

So what drives cryptocurrency arbitrage?

There is no central body that serves as a price correcting party in the cryptocurrency markets since they are decentralized and deregulated, which creates an extraordinary amount of crypto arbitrage trade opportunities. 

Serving as a primer, this article will help shed perspective on crypto arbitrage trading while enlightening traders of how they can take advantage of price differences in today’s current market through instances such as: 

  • Mispricing Errors 
  • Market Lag
  • Bounty & Manipulation-Prone Markets
  • Sparse Order Books
  • Inta-Agur Mispricings
  • Political/Ideological/Cognitive Bias
  • Global Health Crises (COVID-19)

When compared to other forms of investment, cryptocurrency trading can be categorized as a relatively new method of investing.

Since the inception of the first cryptocurrency in 2009, there have been hundreds of cryptocurrencies launched and integrated into trader-centric hubs like exchanges, brokers, and coin swap platforms. 

As cryptocurrencies continue to rise in demand, traders will be able to better execute cryptocurrency arbitrage through the following methods:

  • Manual Crypto Arbitrage – Manual trade management and input on trades.
  • Automated Crypto Arbitrage – Autonomously employed backtested strategies that are operated by an automated script that triggers trades.
  • Quasi-Automation Arbitrage – Identifies arbitrage trade opportunities and alerts traders through semi-automated scripts, trades are not automatically executed.

Manual Arbitrage:

No.CryptocurrencyYear of Launch
1.Litecoin (LTC)2011
2.Ethereum (ETH)2015
3.Zcash (ZEC)2016
4.DASH (Dark Coin)2014
5.Ripple (XRP)2012
6.Monero (XMR)2014
7.Bitcoin (BTC)2009
8.NEO (NEO)2014
9.Cardano (ADA)2017
10.EOS (EOS)2018

Table 1. Shows the top 10 popular cryptocurrencies and their year of launch.

When compared to other investment industries like Forex, Stocks, or commodities, cryptocurrencies tend to exploit more market inefficiencies as a result of being unregulated and newer. 

Now moving forward. 

Let’s say that you’ve decided to stick to manual arbitrage trading, you are now left with having to decide between local and international trade: 

Cryptocurrency Arbitrage (Between Countries) – Tends to be more difficult since there are higher returns while converting cryptocurrencies takes time due to verification steps.

Cryptocurrency Arbitrage (Between Brokers/Exchanges) – Tends to possess a smaller average return as a result of floating spreads but has a knack of being easier to trade.

International Arbitrage

While this may have happened a couple of years ago, the 2018 Korean Arbitrage still serves as a great example of international cryptocurrency arbitrage. 

To summarize, Mr. Helland was scanning through the prices of cryptocurrencies during the holiday period and unbeknownst to him at first, noticed a significant price gap. 

Noticing how the Koreans tend to pay around 50% more for their cryptocurrencies, Mr. Helland pondered whether this could be an area of exploitation. 

Unfortunately, the plan Mr. Helland concocted was not plausible due to Korea’s banned use of western exchanges where it would have been virtually impossible to withdraw money from South Korea to his country of residence. 

By developing a collaboration with someone in the country itself, Mr. Helland was able to get Mr. Kim involved, who helped source out the most profitable payment methods (which ended up being Skrill) where they were later able to exploit cryptocurrencies and perform a 50/50 split on all trades. 

Unfortunately, the South Korean Government eventually caught on and later went on to entirely ban cryptocurrencies, therefore eliminating any more trade exploits. 

So what did we learn from this story?

  • Identify & Seize Opportunities – Opportunities occur within the financial markets every second, Mr. Helland saw an opportunity and found a solution to take advantage of the opportunity at hand.
  • Register Trading Accounts – Coinbase (local broker) and korbit (international) brokerage were used. 
  • Exchange Cryptocurrency – Buying opportune cryptocurrencies at a lower price locally then selling it higher internationally. 
  • Withdrawal – Withdrawing then converting profits into local currency. 
  • Repeat – Repeat the above step and generate consistent money flow! 

Despite netting a greater return, Mr. Helland’s process of liaising overseas with Mr. Kim was a tedious process due to the exchanging and converting of currencies while the aftermath led to the Korean government banning the trades of cryptocurrencies shortly after breaking even. 

Local Broker Arbitrage 

To better understand the inner workings of how local cryptocurrency arbitrage works we provided a theoretical scenario. To simplify matters, assume both brokers list bitcoin: 

  • Broker A reflects a higher trade volume while the price of one BTC offered by the broker is $11,500. 
  • Broker B reflects a smaller trade volume while the price of one BTC offered by the broker is $11,510. 

Now let’s assume that a high-risk headline emerges that encourages people to purchase Bitcoin. Naturally, traders are more likely to gravitate towards more high volume brokers given how they are more likely to fulfill cryptocurrency demands not only at a faster pace but also with more competitive spreads. 

The influx of buyers with Broker A leads to a surge in BTC prices on that platform. 

While Broker B sees less trading volume, there is a slackened demand or surge in the price of Bitcoin on Broker B due to decreased demand-pull. 

This scenario is only possible because of the decentralized nature of cryptocurrencies, where the forces of supply and demand are acted upon by the individual brokerage first opposed to the market, which then follows shortly thereafter. 

So even though those prices across would rise in the market, those prices are rising at a rate different than brokers due to cryptocurrencies decentralization. 

This is where price inefficiencies tend to stick out. 

While the price of BTC climbs from $11,500 to $12,500 on Exchange A, less trade volume is met on Exchange B causing the price of BTC to climb on Exchange B from $11,510 to $12,400. 

This is where arbitrage comes into the fold and here’s how it could be traded:

  • Buy BTC from Broker B for $12,400.
  • Transfer BTC from Broker B to Broker A.
  • Sell BTC to Broker A for $12,500, securing a profit of $100 per BTC.

Challenges of Manual Arbitrage Trading 

Pulling off manual arbitrage takes a combination of patience, careful planning, and unwavering commitment that requires both extensive effort and time by traders.  

Despite manual arbitrage trading being a relatively more safe investment method, traders may still face obstacles regardless of the strategies employed such as: 

  • Prolonged transaction execution may result in trades being placed after your window of opportunity has already passed. 
  • Cryptocurrency arbitrage is becoming more popular, therefore creating a smaller window of action for arbitrage traders. 
  • Levies, taxes, regulations, etc exercised by your regional country.
  • Making careless mistakes such as wrong lot size when performing trades out of human error or by being too greedy.  
  • Cryptocurrency Safekeeping – While exchanges require physical cryptocurrencies to trade from one platform to another, holding a large sum of cryptocurrencies with unreliable crypto-banks increases your risk of hackers stealing your hard-earned cryptocurrencies. 

Before trading cryptocurrencies online make sure you investigate and perform background checks into the legitimacy of exchanges. 

You may learn about some of the top-used platforms for cryptocurrency investing this past year. 

Bitstamp

Cryptocurrency platforms such as Bitstamp provide not only a smooth interface but an ultra-secure way of storing trader’s cryptocurrencies. Their customer service team goes above-and-beyond by reaching out willingly if needed while also offering 24-hour dedicated helpline support. 

Bitfinex

Similar to Bitstamp, Bitfinex provides a more personalized trader dashboard that is customizable while their site includes a list of prices and trade volumes for your referral when trading for the day, weeks, or months. A demo account is available for technical gurus who heavily test trading strategies while there appears to be a significant number of unsatisfactory traders who’ve shared bad experiences while using Bitfinex as their primary account. 

Kraken 

First-time traders may be best-suited for Kraken, a unique exchange dedicated to beginner traders. Providing trading resources and educational insights geared towards novice traders, Kraken may also appeal to institutional traders given their ability to effectively manage high volume trade requests. 

Automated Crypto Arbitrage 

Automated crypto arbitrage has skyrocketed in terms of demand and application. 

Through innovations in technology, day traders can not only participate with a more seamless arbitrage trading experience but also can benefit from the increased accessibility. 

For instance, Expert Advisors are programs designed to quantitatively predict market direction, identify opportune trade opportunities while automatically executing trades. 

The main advantages regarding auto arbitrage would be that it saves traders both time and effort. 

To take it one step further, if you’re an investor with that possesses coding knowledge, you could develop a custom Expert Advisor tailored around your style of trading while traders lacking coding and programming know-how can always search for free bots on open-source platforms such as Forex Factory, Reddit, or Telegram groups although be warned at how there may be royalties or fees involved with the more sophisticated Expert Advisors. 

One way to bridge the gap between not knowing how to program your Expert Advisor while having verified and proven trading strategies would be to propose a collaboration between a trader who possesses coding knowledge through forums like Reddit, where each other’s services would be mutually beneficial. 

While experienced traders are more likely to float towards constructing specialized Expert Advisors, there are many Expert Advisors available through a cryptocurrency arbitrage website such as the following: 

Cryptohopper 

An industry-leader, Cryptohopper is well-known in the auto-trading arena that provides a programmable auto-trader while their team of Professional Analysts around the globe provides trading signals to bot users directly. To add, Cryptohopper’s analysts also share insights into how to better strategize as well as sharing their trade methodologies to their community. No trade fees are involved although monthly licensing fees between $16.58 to $83.25 are charged while a free 7-day trial is available. 

3 Commas 

Compatible with exchange titans such as Coinbase, Kraken, Binance, Bitfinex, and more, 3 Commas provides a commission-free smart trading terminal and auto trading bots that are available 24/7. Trade tutorials are provided as well as options to copy high performing traders within the 3 Commas community. 

Blackbird 

For cryptocurrency trading, Blackbird is a free to use bot where all the files required for the Blackbird program are shared on the site. While Blackbird is not supported by some exchanges, Blackbird is compatible with other brokers while first-timers who lack a programming background are strongly urged not to try Blackbird, as there are stories of traders losing money as a result. Here traders may find discussion forums dedicated to the Blackbird community that are aimed to help troubleshoot minor problems while using this bot. 

Challenges of Automated Arbitrage Trading

Bots are well-known not only to be consistent but also efficient while being perfectly capable of autonomously running rule-based arbitrage strategies.  

However, it should be noted that automated bots lack the discretionary dimension to arbitrage, which may prove to be the most profitable. You see, in a market where the only constant is price changes, headline risk may produce unforeseen adverse implications on the working conditions of bots [Whipsaws]. 

Unless your bot is programmed to handle a multitude of pre-defined trade strategies for varying market conditions, bots tend to be ineffective with keeping up with market condition changes, which may result in miss-trades that are sure to add up over time. 

While as a whole, bots may appear to best one of the best options when considering sustainability, traders should also closely bear in mind the time and financial commitment that is needed in terms of performing backtesting and bot updates, which help ensure the long-term profitability of the bot. 

When browsing the net for crypto trading bots, make sure to seek out and avoid red flags and deals that fit the adage of ‘being too good to be true.’

Last but not least, you can always keep your eyes peeled for online warnings at free open-sourced websites such as Telegram groups or Reddit

Quasi-Automation Arbitrage Trading 

Bringing together the advantages of both manual arbitrage (control) and automated arbitrage (speed), quasi-automated arbitrage trading signals are either derived from bots that analyze and filter cryptocurrencies and brokers for you to find suitable trades or they are provided by a signal provider. 

Personalized EA

Finding quasi-automated arbitrage EAs is possible through open-platform forums such as Forex Factory where people oftentimes share trade ideas, their unique trading approaches for personally-developed EAs, or simply to share knowledge. Generally, these EAs can be found for free although you may have to pay a small fee for others to purchase the licensing rights of the Expert Advisor. 

Bitsgap 

Featuring an all-in-one platform, Bitsgap provides cryptocurrency trading, extensive portfolio management, crypto arbitrage trading operated by a built-in crypto arbitrage script, crypto arbitrage signals, a trade demo, and one of the best arbitrage crypto bots in the market known as the Bitsgap Bot. Operating commission-free, Bitsgap provides a 14-day free trial which is followed by trading plans that are billed monthly from $19/month, $44/month, or $110/month. 

Tools for Arbitrage Trading 

Before conducting manual arbitrage, some factors to consider would be:

  1. Risk Management
  2. Broker of Choice 
  3. Cryptocurrencies of Choice 
  4. Local/International Trade
  5. Reliable News & Forecasts
  6. Dependable Cryptocurrency Banks

Risk Management 

Risk management is the key to all trading strategies. 

Before trading, take time to calculate your risk/reward which can be done more efficiently through our Cryptocurrency Arbitrage Calculator

By using this arbitrage calculator, traders can assess risk management and efficiency needs which may otherwise be missed during the time to takes to conduct manual risk calculation. 

Broker of Choice 

By using this Live Bitcoin Arbitrage Table, traders can see what available brokers are offering for Bitcoin. 

The tables highlighted in green feature exchanges that could be considered as good candidates whereas those highlighted in red should be considered less. 

Please bear in mind that the markets a constantly moving, therefore, price changes are occurring constantly while this table does not reflect market depth, transactional fees, or trade volumes. 

Cryptocurrencies of Choice 

If you aren’t much of a Bitcoin fan, Intra-Exchange Arbitrage is available which involves the buying and selling of different types of cryptocurrencies. 

To help aid Intra-Exchange arbitrage, we came across mobile apps that provide price-specific Bitcoin alerts and notifications while there are sites that show different cryptocurrency spreads while also supporting alert notifications

Local/International Trade 

Your starting budget and risk appetite can help you determine which route of arbitrage trading is best suited for you. As previously summarized: 

Cryptocurrency Arbitrage (Between Countries) – Tends to be more difficult since there are higher returns while converting cryptocurrencies takes time due to verification steps.

Cryptocurrency Arbitrage (Between Brokers/Exchanges) – Tends to possess a smaller average return as a result of floating spreads but has a knack of being easier to trade.

Reliable News & Forecasts

Sticking to your trading plan is important but perhaps even more paramount is that you stay ahead-of-the-curve with what’s happening throughout the world. 

This is particularly important when it comes to news concerning your preferred cryptocurrency of trade although you should always tread with caution with how ‘fake news’ continues to be widespread. 

To evade fake news, the media outlets below tend to deliver live and reliable news: 

Coindesk

Providing news regarding political and economic efforts that may affect cryptocurrencies, Coindesk provides a reliable media outlet while also sharing additional pages that can help educate novice traders who are new to the world of cryptocurrencies. 

Cointelegraph

Cointelegraph operates as a reliable and dedicated news outlet that has a reputation of providing information faster than competitors while also providing market tools and a price analysis breakdown on every cryptocurrency. 

Review of 2020’s Top Cryptocurrency Banks

The last thing that a cryptocurrency trader wants to encounter would be for their account or exchange to get hacked and wake up to find out that all your cryptocurrencies have been stolen.

Therefore, make sure to take time to conduct research and carefully weigh your options. 

Coinbase

Coinbase is the world’s largest bitcoin exchange.

Featuring a flat 1.49% fee per transaction, Coinbase is highly recommended for new cryptocurrency traders while those residing with the United States may link their MasterCard credit card to allow for instantaneous payment and transaction capability.

There are options to make your account pro should you be handling larger sums of cryptocurrencies which greatly reduces transactional fees and may enable you to buy bitcoins for a 0% fee. 

Bitwala

Charging a slightly smaller fee than Coinbase, Bitwala charges a flat 1% fee for trades and renders a user-friendly trading platform that is supported through desktop and mobile apps. 

To add, Bitwala also offers traders to activate a Bitwala card that can be used with their trading account although it should be noted that some traders faced difficulties when it came to registering a trading account. 

Here are some stories where accounts have been blocked all of a sudden, and more. 

Coinsbank

Increasing their repertoire of cryptocurrencies, Coinsbank supports 10 cryptocurrencies while supporting fiat-crypto trading. 

Differentiating fees between market takers and makers, Coisbank charges a flat 0.50% trading fee for takers, a 0.20% fee in any currency for makers, while there is a fixed withdrawal fee of 0.0001 BTC for BTC-withdrawals. 

Deposits are typically performed through credit/debit cards, wire transfer, or cryptocurrencies although Coinsbank also supports Perfect Money, QIWI, Epay, and AdvCash Wallet.

Similar to Bitwala, CoinsBank offers traders a debit card linked to their wallet while also sharing complaints about CoinsBank’s mismanagement of users’ cryptocurrencies, more specifically, on the topic of hidden/inactive fees. 

Coinmama

Coinmama supports international cryptocurrency trading in nearly every country. 

While traders are encouraged to purchase in more high volumes (1,000+ Euro), Coinmama also supports low volume trading although traders should be forewarned about having to pay additional transaction fees, which tend to float above the industry average.

Here are some sites that reflect the most-widely used crypto-banks available. 

They summarize some key points such as: 

  • Origins of the Crypto-Banks
  • Advantages & Disadvantages 
  • User-friendliness of Trader Interface
  • Transactional Speed & Fees 
  • Reputability 
  • Trade Volume Limits 
  • How to Transfer Money Into A Startup Account

The Bottom Line

As demand for cryptocurrency trading continues to rise so will market inefficiencies.

While this cause-and-effect remains, increased opportunities will arise for day traders to exploit market inefficiencies through cryptocurrency arbitrage. 

Even though manually trading arbitrage has proven to be safer (as you are in control of every trade aspect) it is time-consuming and could delay your trades which may result in missed trades or lost trades. 

By taking the auto arbitrage route, traders have to put forth less effort and time as trades are autonomously executed for them although there is always the hazard of acquiring a scam EA or spending more than you can afford, therefore, tread lightly.

Then, on the other hand, we have Bitsgap that bridges the best of both worlds through quasi-automated arbitrage trading.

Offering a free 14-day trial, Bitsgap provides traders with all the information required to make educated arbitrage trades in an easy-to-understand format while a cloud-powered trading bot can execute trades automatically on your behalf. 

So long as the cryptocurrency markets continue to be decentralized, cryptocurrency arbitrage will continue to show increased potential, accessibility, and feasibility in the years to follow. 

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