How to Profit on the Crypto Spread: Principles and Arbitrage Tools

How can you make money on the difference between cryptocurrencies prices? This method of trading is called arbitrage. To do it, you need to buy a coin at one exchange or from a private user and immediately sell it where the price will be higher than when or where you bought it.

What to pay attention to. Cryptocurrency arbitrage requires experience in exchange trading – at least stock trading – and technical means: bots, connectors. The price differences can be marginals, so there is nothing to do here without capital.

The content is published for informational purposes only and does not constitute an investment recommendation.

To begin with, let's look at the basic concepts. Cryptocurrency arbitrage is a way of making profit from buying and selling digital money (bitcoin, ether, litecoin, etc.). Users look for arbitrage bundles that allow them to buy cryptocurrency at a low value and sell at a higher value in the shortest possible time.

Exchange (spot) trading is different – you have to wait for some time after buying for the asset to go up in price.

Arbitrage bundles or forks involve buying an asset on the exchange with the lowest value. At the same time, the price of this asset should be higher on other exchanges. In this case, the user can quickly sell the currency with a profit.

How Does the Spread Happen?

A lot of the time, forks occur within the same exchange. This means that the rates for adjacent currency pairs haven’t been equalized yet. For example, forks can appear between ETH/USDT, ETH/BTC, or BTC/USDT. This allows you, for example, to buy bitcoins for USDT and then sell them for ether at a profit. The ether is then exchanged for stablecoins again, and the chain repeats.

Let's look at a simple example of cryptocurrency arbitrage. Let's assume that the same asset costs 15$ on the first exchange and 16$ on the second one. A person purchases crypto on the first and immediately sells this asset on the second. As a result, the user quickly receives income without any risks.

There are several types of bundles: simple and complex, domestic and international, momentary and long-term (when the chain of transactions stretches for several days), intra-exchange and inter-exchange.

A simple bundle usually consists of a single currency pair that has different values on two exchanges. For example, BTC/USD. For this pair, the spread between exchanges often reaches $100 or even higher. At the moment, the difference between CoinBase and Binance US is almost $100.

With the complication of the bundle, the level of earnings increases. For example, if you can find a fork through 1-2 intermediate currencies. When selling USD for USDT and EUR, the spread between Binance and Probit reaches $255. This way, with a turnover of 1 BTC (~$94 150) for 15-20 minutes, the user can get an income of $255, minus any transaction fees. If you have enough to play around with and the proper tools, you can conduct several chains like this daily.

Complex chains usually consist of 3 or more assets, In some cases, this involves fiat transfers, deals between several exchanges and payment systems, and international transactions. For example, someone buys Turkish lira for Russian rubles, then buys cryptocurrency with it, and then makes transfers in the opposite direction. The more complex the chain, the greater the chance of getting a bundle with a high price difference, or spread. However, it’s important to keep in mind that exchanges charge fees for transactions. In addition, there are quite a lot of arbitrageurs now, so profitable bundles get discovered quickly, and after a price correction, they become irrelevant.

Will Profiting from the Spread Work for You?

This strategy will work great for traders who already have experience trading assets but are just getting into the crypto world.

Make note that today, few traders do arbitrage on their own. Usually, people use special trading bots. We’re talking about programs that can automatically conduct deals according to predetermined conditions.

The largest and most profitable investment funds often make money on arbitrage. At the same time, their activity is reduced to the constant improvement of technologies that allow them to quickly conclude deals. Doing it yourself isn’t an easy task and requires tech-savviness and a solid understanding of trading strategies.

It’s also worth considering that the spread in the rates of liquid currencies on the exchanges is very small. To achieve a sensible level of profits you’ll need substantial amounts of money. Private traders can’t compete with large companies. These institutional investors use software to find the most profitable bundles.

How to Make Money on the Crypto Spread

Let's dive a little deeper into the methodology. To begin with, you’d need to create and set up accounts on your exchanges of choice.

Let's consider the main types of cryptocurrency arbitrage:

Inter-Exchange Arbitrage

The most common method. The more platforms you engage in, the easier it will be to find a large spread.

As already mentioned, you can connect special bots and software that allows you to automate arbitrage. Manual search for suitable quotes is definitely a difficult task.

Bots can research trading pairs on dozens of crypto exchanges (both centralized and decentralized) in automatic mode. Statistics show that currently 99% of arbitrage deals are made with the help of trading programs.

You can buy a signal for arbitrage trading. This bot or program will send notifications about cryptocurrency spreads on exchanges and help you make a profit.

However, inter-exchange arbitrage has its disadvantages:

• Exchange limitations. Many platforms are operating under various regulatory bodies and block suspicious activities
• Long withdrawals. Withdrawing funds from the exchange can take some time, which can noticeably affect your earnings, but using long and short orders can help
• Transaction fees between exchanges. You should always consider these and factor them into your math
• Software glitches and miscalculations. Your bot or software can start conducting unprofitable deals – there were cases when traders didn’t have time to disable their software and lost their entire deposits

The main advantage of this trading tactic is that you can earn on the spread on the exchange at virtually no risk. The average profit for arbitrage is 0.01% per one chain of deals, but you can get much more if you engage in intensive trading.

Intra-Exchange Arbitrage

In this case, you conduct a series of deals within one exchange, involving at least three related trading pairs. Here, you earn on a large rate discrepancy.

Let's look at an example. Suppose that cryptocurrency A is worth $1000 and cryptocurrency B is worth $100. This way, 1 A will be worth 10 B. If the trading volumes in the A/B pair increase dramatically, it’s likely that their exchange rate will increase as well. Let's assume that it will rise to the value of 1 A = 11 B. The prices of both cryptocurrencies when exchanged for fiat money may remain at the same level. In this case, you can conduct several deals. For example, buy 1 A for $1000 and then exchange the coin for 11 B. After that, he can sell 11 B for $1100. As a result, you can earn $100 on the cryptocurrency spread.

In terms of fee costs, intra-exchange arbitrage is a more profitable way to generate income than using several platforms at once – you don’t have to pay for inter-exchange transactions. Besides, you won’t have to spend time on transfers between platforms, so you’ll be able to react to price changes much faster.

The disadvantage of intra-exchange arbitrage lies in the limitations of trading platforms. They constantly monitor quotes and try to identify correlations of rates. When the exchange detects a large spread, it quickly eliminates it, meaning that you can’t earn on it anymore. You can combine the last two trading methods to increase your overall income, but it gets tricky.

Multi-Currency Inter-Exchange Arbitrage

This can be described as a symbiosis of the two previous arbitrage types. Here, several coins and exchanges are used simultaneously to turn a profit.

Here’s an example:

• ETH is purchased on exchange A for USDT
• ETH is traded on exchange B for BTC
• BTC is sold on exchange A for BUSD

These chains are pretty complex. It’s difficult to build and conduct them by hand, so multicurrency interexchange arbitrage is usually performed by bots.

P2P Cryptocurrency Arbitrage

Arbitrage on P2P platforms is also worth looking into. Here, profit is possible because P2P users negotiate the value of the deal among themselves. This way, the price of cryptocurrency on a P2P platform may differ from the market price.

For example, you buy BTC and sell it on one platform, earning on the difference in rates offered by another user. At the same time, the price on a P2P platform may be lower than the market price, but this is pretty rare.

A lot depends on your payment method. This factor affects the cost of buying/selling cryptocurrency through P2P deals. The point is that not all banks or wallets are convenient for users, andsome options might not be supported by your chosen trading platform at all. This is why some people pay extra for direct fiat withdrawals to a specific service.

There is a more complicated way of earning money on P2P arbitrage, too. You can open your own ads to buy or sell cryptocurrency, and set the value of these offers yourself. The price can be higher or lower than the market price, it’s up to you – just make sure it’s a competitive offer on the exchange you chose.

It’s important to consider the factors that affect users. Traders will buy an asset at a price below or above market if they get additional perks. These can be payment without KYC, direct withdrawal without fees, or exchange for an obscure fiat currency. Familiarize yourself with the features of specific P2P platforms before getting started so you get the most out of them.

Crypto Arbitrage: What to Look Into

Arbitrage trading is a very popular way of earning money. However, its complexity gradually increases, as the number of markets, coins, and trading pairs grows. And the competition is also increasing. Meanwhile, opportunities for earning money are expanding, too. Let's consider a few tips that will help utilize them in time.

Consider the risks before you start. You should realize that arbitrage trading has its own risks. So, it’s better to invest exactly as much money as you won’t regret losing.

Don’t forget about fees and taxes. Fees are your additional expenses. You can lose a significant part of your income because of these, so pay attention.

Select trading pairs and exchanges with high liquidity. Otherwise, order execution will take longer.

Try to work with volatile markets. So, you will have more opportunities to make money on the difference of cryptocurrencies on exchanges — just make sure you assess your risks.

It’s important to carefully select exchanges for trading. You need to make sure that the platform works with your country, too. It’s better to check in advance if the exchange needs identity verification, what the size of the minimum deposit is, and what currencies and pairs can be used. High rating and excellent reputation of the platform are important advantages.

F.A.Q.

How can an inexperienced trader profit from the cryptocurrency spread without investing?

Unfortunately, you’ll have to invest in any case. The trader must have at least a small starting capital.

What’s the ‘spread’?

The spread is the difference in the prices of different coins. This is the value that makes up the trader's profit.

What’s an order?

An order is a buy/sell submission formed on a cryptocurrency exchange.

What’s an order book?

It refers to all currently open orders on the exchange still awaiting execution.