Cryptocurrency Arbitrage in 2020: Manual and Automated Approaches

26 min read

Introduction:

As old as the financial markets having existed since the emergence of Over-The-Counter trading, arbitrage opportunities are abundant throughout history. The art of simultaneously purchasing and selling of an asset or financial instrument to net a risk-free profit from exploiting price inefficiencies is the epitome of trading, practiced by many and is still valid in this modern age. Despite technological advancements allowing the correction of price differences in financial instruments like currencies to a point which arbitrage is near impossible, exploitable inconsistencies caused by market inefficiencies still exist in the financial markets, in the form of other instruments, namely cryptocurrencies. Cryptocurrency arbitrage too, involves simultaneous trading of cryptocurrencies to profit from pricing discrepancies between brokers. With decentralization and deregulation being the main driver of cryptocurrency markets, a central price correcting party does not exist, presenting an abundance of arbitrage opportunities for traders in the know.

This primer article will be focusing on arbitrage in a cryptocurrency perspective and how traders can take advantage of price differences in current markeus reasons such as:

  • Pure Mispricings
  • Market Lag
  • Bounty and Manipulation-Prone Markets
  • Cognitive/Ideological/Political Bias
  • Sparse Order Books
  • Intra-Agur Mispricings

Cryptocurrency trading is relatively new, with the first ever form of cryptocurrency only created in 2009. Since then, many other types of cryptocurrencies has surfaced, with multiple emerging brokers offering cryptocurrency brokerage services as cryptocurrencies, known for its volatility and tradability,  began gaining market share in the financial markets.

Traders would keep a keen eye for arbitrage opportunities and trade it manually. Alternatively, traders would resort to Expert Advisors to help them identify trading opportunities or automatically trigger trades for them should an opportunity arises.

There are two ways of performing crypto arbitrage:

  • Manual – Manual input on trades and money management.
  • Automated – A script programmed to trigger trades for a particular customized trading strategy.
  • Quasi-Automation – Semi-automated scripts programmed to identify trading opportunities, and alert the trader, but does not automatically trigger trades.

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.

Cryptocurrencies, being relatively new and relatively unregulated, the likelihood of an exploitable market inefficiency is much higher than other regulated instruments like Forex, stocks and commodities.

Say you have decided that you would do everything manually. Now you have to decide, international or local trade:

Cryptocurrency Arbitrage Between countries – harder to perform (takes time to convert currencies), higher return.

Cryptocurrency Arbitrage Between brokers/exchanges – easier to perform, smaller average return due to floating spread.

International Arbitrage

The 2018 Korean Arbitrage was an example of international cryptocurrency arbitrage. Summarising the story, Mr Helland was looking through the prices of cryptocurrency during the holiday period and noticed a huge price gap. He noticed that the Koreans are paying 50% more for their cryptocurrency and it could be a potential area of exploitation. He carried out his plan but it was not possible to do it alone as Korea banned the used of western exchanges thus making it virtually impossible to withdraw money from South Korea to his home country. 

Mr Helland decided that he should do a collaboration with someone in the country itself. Thus, Mr Kim was involved. Mr Kim help source out on which payment method is the most profitable one and they ended up using Skrill which was legal in South Korea and thus able to exploit the cryptocurrency and is able to split 50/50 of the trades. To much disappointment, the South Korean Government caught on and banned cryptocurrencies entirely, and they could not carry out any more exploitation.

What did we learn from this example? 

  • Identify your opportunities – Saw an opportunity in the Korean market where they pay higher in Korea for that particular cryptocurrency.
  • Set up your accounts – Coinbase (local broker) and korbit (international) broker was used.
  • Exchange Cryptocurrency – Buying selected cryptocurrency at a ‘lower’ price locally and selling it internationally.
  • Withdrawal – Withdrawing and converting winnings to local currency.
  • Repeat – Repeat all steps and see consistent money flow!

While netting a higher return, the process of liaising with a representative overseas, exchanging and converting currencies is very time consuming. In this example, they faced the wrath of the Korean government which banned the trade of cryptocurrencies after breaking even. 

Local Broker Arbitrage

To explain the inner workings of how a local cryptocurrency arbitrage works, let us consider an example of a theoretical scenario. Assume two different brokers that both lists bitcoin:

  • Broker A has a higher trading volume. The price of BTC the broker offers currently is $10,000.
  • Broker B has a lower trading volume. The price of BTC  the broker offers currently is $10,005

Assume that a big headline risk encourages people to buy BTC. The catalyst of widespread demand for BTC leads buyers to high volume brokers as they are more likely to fulfil demand for cryptocurrency at a faster speed, with a more competitive spread.

The surge of buyers causes a surge in BTC prices on large exchanges such as broker A. Price would react much slower as Broker B sees less trading volume, therefore, lesser demand-pull. This is only possible due to the decentralized nature of cryptocurrencies that supply and demand forces act on the individual brokers first before transmuting it’s full effects into the market. Ergo, while price across the market would rise, it is at a different rate for different brokers. BTC reaches $11,000 on exchange A, but only rises to $10,900 on exchange B, which is where arbitrage comes in. A possible trade could be to:

  1. Buy BTC from broker B for $10,900.
  2. Transfer your BTC to Broker A.
  3. Sell your BTC to Broker A for $11,000 securing a profit of $100 per BTC.

Challenges of Manual Arbitrage Trading:

Manual arbitrage requires patience, planning and commitment to pull off. Traders take extensive efforts contemplating on their trading strategy, and listing down potential trading routes. Whilst deemed to be a relatively safer option, you may face obstacles such as:

  • Transaction taking a longer time to fill, thus failing to execute the trades in time before the window of opportunity closes.
  • More traders are aware of cryptocurrency arbitrage resulting in much smaller window of action
  • Your own regional country regulations on cryptocurrency trading (levies, taxes etc.)
  • Human error/greed – Purely making careless mistakes (eg. wrong lot size) when performing the trades.
  • Stolen Cryptocurrency – Trading from platform to another, you are required to hold physical cryptocurrencies. Should you be holding a large amount of cryptocurrencies in an unreliable cryptobank, you are at risk of hackers stealing your cryptocurrencies as you store them. 

You may explore and do a background checks or even taking a look on their website to see if they are reliable. You may also like to see the top used platforms for cryptocurrency investing in 2019. 

Bitstamp

There are sites like Bitstamp which has a smooth interface and it is very secure in keeping your cryptocurrencies. They are willing to reach out and go beyond with their customer service, offering a 24-hour dedicated support helpline.

Bitfinex

Bitfinex has similar things bitstamp has to offer. But they give you the option of personalising your interface to make your app usage efficient and to your own personal use. Their website also includes lists of prices and trade volumes for your referral when you are trading for the day, weeks or even months. Bitfinex do have demo mode for those who would like to experiment with their trading strategies first before starting an account with them. There are a number of unhappy users that share their bad experiences when using Bitfinex as their main account.

Kraken

If you are a total beginner, Kraken may be best suited for you. What makes Kraken so unique is that they are dedicated to beginner traders and they have the resources just for new traders who wants to pursue the route of trading. If you are trading with high volume , you may also consider using Kraken. No matter how small or big you are, they provide services for institutional traders as well.

Automated Arbitrage:

Automation is another popular alternative. Expert Advisors are programmes designed to quantitatively predict market direction, identify opportunities and automatically execute trades. 

This takes most of the time and effort away from traders. A trader with coding knowledge could programme their own Expert Advisor. While potentially time-consuming initially, an aptly programmed Expert Advisor would be a good investment for the busy trader in terms of time and sustainability. Traders can also search for free bots on open-source platforms (eg. forex factory,reddit,Telegram groups) and adopt the Expert Advisor most suited to their strategy. Royalties and fees might be charged for the more sophisticated Expert Advisors. 

While traders versed in coding could design their own Expert

Advisor, those not versed in coding as much as trading may share their trading knowledge and strategy on forums like Reddit, possibly proposing a partnership with a trader that is more versed in coding, but lacking in trading knowledge.

Experienced traders who want to trade on their own terms would ideally be seeking to design his own Expert Advisor. While there are many Expert Advisors in the market, some are mentioned more than others. Here are a few examples:

3 Commas

It is a popular trading bot which is compatible with the brokers that I have mentioned above. It works 24/7 and you can monitor your trades on mobile as well as your desktop.It provides a tutorial on how to trade in the market as well as options to copy trades by well performing traders in their community, which is like performing semi-automated trades.

Cryptohopper

Cryptohopper is very popular in the autotrading scene. Apart from able to programme autotrader,they too provide an ever growing panel of professional analysts around the globe. They provide signals to the bot users directly and they have their own community which shares topics such as strategizing as well as their ideas on approaching the market. Cryptohopper does not charge any trading fees, they offer a free trial month and the licence costs from $19USD-$99USD Monthly.

Blackbird

Blackbird is a free to use bot for cryptocurrency trading. All of the files that are required for you to program the bot is all in the website. It does support some brokers however it is still going through some testings to be validated by other brokers as well. It is strongly not recommended for first timers or those who do not have a programming background as there are stories that they lose money because of it. You may find discussion forums dedicated to blackbird that might help with troubleshooting some minor problems if you still decide to use this bot.

Gekko

Gekko is another free and open sourced bot. It can be run on all major operating systems.(Windows,Linux,macOS) It does have the potential to run on the cloud as well. It supports 16 different exchanges (including Bitfinex, Bitstamp and Poloniex). Just let them know which exchanges you would like and Gekko does the rest for you. They also have a dedicated forum to ensure you run their program smoothly.

Challenges of Automated Arbitrage Trading:

Bots are known to be consistent and efficient and follows rules-based arbitrage strategies to a precision like no other. However, it lacks the discretionary dimension to arbitrage that might prove to be profitable. In a market where the only constant is change, headline risk might have unknown adverse implications on the working conditions bots [Whipsaws]. Bots are also unable to change with market conditions and this may result in repeated mis-trades that would add up in the long run. 

While bots are a good option when considering sustainability, time and money has to be invested in terms of backtesting and updates to ensure the long term profit-making integrity of the bot. 

When considering to source for online bots, be sure to look out for red flags and deals that seem too good to be true. Traders have reported dubious activities and scams. You can keep a lookout for warnings online at free open sourced websites. (eg. Telegram groups, Reddit) These forums double as discussion platforms where like-minded enthusiasts share the latest meta-ideas and sometimes (rarely) insider information as well.

Quasi-Automation Arbitrage Trading:

A third option is also available – quasi-automated. This basically brings together the best of both manual arbitrage (control) and automated arbitrage (speed).The signals can either come from bots which filters cryptocurrencies and brokers for you and if it finds a suitable trade, it will show you a prompt first. 

Similarly, when someone provides you with trading signals, it is entirely up to you whether you would like to take the trade or not.  It is totally your decision to either take or pass up on that trade signal given by the bot or the signal provider.

Personalised EA

One such places where you can find such EA like this is at open-platform forums such as forex factory. People often share ideas and their own strategy on their personal EA with the purpose of other traders to benefit and trade better. Usually they might be free or you may have to pay a small fee in order to have the rights to pay for the EA itself.

Bitsgap

I highly recommend traders with all levels of experience to try out bitsgap. Bitsgap offers thousands of cryptocurrencies and brokers all conveniently available in one platform. Which means you will only need one account to carry out all of your cryptocurrency arbitrage plans. With access to the different types of cryptocurrencies and exchanges conveniently in one site, you can quickly compare to find the best rates as you are able to instantly switch between cryptocurrencies and brokers. With that said it is one of the best platforms if you are going to carry out plans for cryptocurrency arbitrage. They allow you to set your stop loss, take profits and even stop/limit orders. You may register and get their free trial. Use the demo account to your advantage to test out new strategies risk-free!

Tools for Arbitrage:

Some factors to take into consideration before conducting manual arbitrage are:

  1. Risk Management
  2. Selection of Broker
  3. Selection of Cryptocurrency
  4. International/Local Trade
  5. Reliable News
  6. Reliable Cryptocurrency Bank

Risk Management

As with all trading strategies, risk management is key. You may have to take time to calculate your risk/reward when attempting to trade any form of currency. While we have an available Cryptocurrency Arbitrage Calculator for you risk management and efficiency needs, prices may run during manual risk calculation and the arbitrage opportunity might be altogether missed, or worse, if in the midst of conducting a manual arbitrage, may result in a loss due to a slow response time.

Selection of Brokers

You can also use this Live Bitcoin Arbitrage Table to see what are the available brokers are offering for bitcoin.

Table 2. Shows a screenshot of the table displayed on the website.

Tables highlighted in green are the exchanges you would likely be proceeding with where the ones highlighted in red are ones you might want to avoid. Do take note that prices changes constantly and this table does not reflect the market depth as well as the transaction fees incurred by the mentioned brokers.

Selection of Cryptocurrency

If bitcoin is not your cup of tea, you can try out Intra- exchange Arbitrage which involves buying and selling different type of cryptocurrencies altogether. There are sites that shows different cryptocurrency spreads and provide alerts, there are mobile apps as well that provide the required notifications when bitcoin reaches a certain price.

International/Local Trade

Depending on your risk appetite and the amount you have started with, you may use those factors to help you decide which route to go to. As summarised above:

Cryptocurrency Arbitrage Between countries – harder to perform (takes time to convert currencies), higher return.

Cryptocurrency Arbitrage Between brokers – easier to perform, smaller average return due to floating spread.

Reliable News

It is important to stick with your plan of trading. More importantly, it is best to keep up with the news on what is happening around the world. Especially if it is concerning the cryptocurrency that you are involved in. In 2019, the likeliness of receiving ‘fake news’ is quite often so you will be wondering where would find live and reliable news.

Coindesk

Coindesk offers news regarding political and economic effects that cryptocurrencies may be affected with. It also has additional pages to educate newer traders that are new to this concept of cryptocurrencies. (Eg.Blockchains, what are cryptocurrencies etc.) 

Cointelegraph

Cointelegraph is more dedicated to more on reliable news. It is news that you can expect to get on time. It also shows the price analysis on every cryptocurrencies that is popular and provide market tools to aid in your next trade.

Review of 2019’s Cryptocurrency Banks

The last thing you want happening to you as a cryptocurrency trader is for your account to get hacked and all of your cryptocurrencies gone with a snap of a finger. Do take time and consider weighing down your options.

Coinbase

It is the world’s largest bitcoin broker. There is a flat 1.49% fee on all transactions. It is highly recommended for new traders in cryptocurrency. If you are living in the United States, you may link your MasterCard credit card to allow for instant payment/transaction. There is an option to make your account pro if you are handling large amounts of cryptocurrency. It does greatly reduce your transaction fees and might able to buy bitcoins for 0% fee!

Bitwala

Bitwala charges a flat fee of 1% for every trade. Slightly lower than coinbase. It is user friendly. They have a mobile app for you to manage your cryptocurrency and trading it. They also provide you with your own Bitwala card for you to use with your trading account. However,starting an account may be a hassle. There are stories where accounts got blocked all of a sudden etc.

Coinsbank

CoinsBank only features four cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Ripple. CoinsBank differentiates between fees for takers and makers. Their trading fees for takers are 0.50%, which is higher than the global industry average. Fees for makers are around 0.20%. They also charge a withdrawal fee of 0.0001 BTC. Fiat-crypto trading is available on this platform, enabling the exchange friendly towards new cryptocurrency investors. Deposits can be made through bank transfers and credit cards, as well as existing cryptocurrencies. CoinsBank also has a debit card that is connected to the users CoinsBank wallet similar to Bitwala. However, there have been many complaints about CoinsBank mishandling users’ cryptocurrencies, especially with the topic on hidden/inactive fees. 

Coinmama

Coinmama may be your option of you are handling international trades as they do work in almost all countries. They encourage traders to purchase in high volume(Above 1000EUR). You can still trade in lesser volume sing Coinmama, just be prepared to pay some transacting fees. They charge higher than the average bitcoin brokers out there.

There are some sites that lists down the top most used crypto-banks available. They summarise the background of the crypto-banks and reflect their advantages/disadvantages, how easy/hard their user interface is, level of privacy,speed of transaction, transaction fees,reputation and their limit for trading volume. They also indicate on how to transfer the money in order to start up your account.

Conclusion:

As cryptocurrencies are getting more popular, market inefficiencies will start to surface. Traders should take this opportunity to take a look at cryptocurrency arbitrage. 

Trading manually is safer as you are in control of every aspect of the trade. However, it is very time consuming and it could delay your trades which results in unsuccessful cryptocurrency arbitrage opportunities. Taking the automation route takes less effort as bots are being programmed to carry out your trades. However, sourcing out for them could be most of the time expensive or a scam. Tread lightly.

Bitsgap on the other hand might be the best of both worlds. All of the information required is all there on the platform, and trades orders can be placed to execute your trades automatically. 

Cryptocurrency arbitrage shows a lot of potential as they are currently decentralised. So take this opportunity to trade with a clear mind and take advantage of the cryptocurrency arbitrage method to secure some winnings for this year.

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