You wake up one morning to see that Bitcoin’s price is going really well. Then you decide to sell part of your bitcoins for a handsome profit. However, your crypto exchange is showing a 4% lower selling price than the Google alert. While you’re “walking” from one exchange to another, you’ll also notice that apart from being extremely volatile, Bitcoin doesn’t have a unified exchange rate.
On second thought, this Bitcoin behaviour is quite normal. The price of cryptocurrency is formed on a daily, maybe hourly basis, exclusively on the supply-vs-demand factor. It’s not pegged to CAD, for example, and neither is it associated with any political system or central bank.
The point is that you can take advantage of this inconsistency by using a technique called crypto arbitrage. It is a trading strategy deeply rooted in the traditional stock market where you buy a certain asset from one exchange, sell it on another, and earn from the price difference.
Its dynamic nature makes Bitcoin an optimal financial instrument for playing the arbitrage game. That’s why we’ll outline all aspects of this trading technique from a crypto perspective, including the reasons for such price desynchronization.
Why Is the Bitcoin Price Different on Cryptocurrency Exchanges?
We usually google the current Bitcoin price or rely on a well-established price tracker to signal any movements. This somehow leaves an impression of unification, which is absolutely wrong. Price trackers usually show an average value based on data from a few high-performing crypto exchanges, while Google uses the API of Coinbase Pro.
Coinbase Global, Inc is a San Francisco-registered company — so it calculates the BTC exchange rate against the American Dollar. Even without Google’s interference, the U.S dollar has been naturally serving as a base unit in establishing crypto monetary value since the launch of Bitcoin in 2009.
This means that if you type “BTC to CAD,” the Google algorithms will throw out the current exchange rate of 1 BTC in USD as calculated by Coinbase, with the USD amount automatically converted into CAD. And that number can be rather unrealistic and different from the exchange rate of your local provider Bitbuy.
Even if you use the Coinbase exchange, there is an added amount of transaction fees not included in the base exchange rate. What’s more, different transaction fees are one of the main reasons for different prices on crypto exchanges, together with liquidity.
We could readily say that exchange liquidity is a measurement of successful performance. In general, liquidity is the level of ease at which one asset can be exchanged for fiat currency or another digital asset without making a negative price impact. For example, cash is the most liquid product as you can immediately convert it into another asset of your choice. On the other hand, your old-timer Porsche isn’t, simply because it’s difficult to find a millionaire collector to buy it.
Despite the straightforward definition, many factors make a liquid exchange or asset on a crypto exchange, such as traffic and popularity, trading volume, and market cap. All in all, a liquid exchange ensures a guaranteed execution of your transaction, following the same pattern — the higher the supply, the lower the prices.
That’s why we’ll use Bitcoin as an example in this article — it’s incomparably the most liquid crypto in the ecosystem. For sure, you can also start arbitraging with other popular altcoins, such as Ethereum (ETH) or Dogecoin (DOGE).
As mentioned above, the listed exchange rate of Bitcoin doesn’t cover the fees that come with the transfer. Crypto exchanges can differ to a great extent in the fee package they offer. This includes trading fees, deposit fees, withdrawal fees, and transaction fees.
Unlike other fee types, transaction fees aren’t set by the exchange itself, as those are blockchain fees imposed by miners. When it comes to Bitcoin, transaction fees vary depending on the current market load, as miners have a limited capacity for processing transactions at a certain time.
When you “play” on your own, you can adjust these fees on your independent Bitcoin wallet to “remind” miners of faster service. However, centralized exchanges regulate the transaction fees themselves based on current congestion parameters and their internal policy, giving you a predefined amount of a transaction fee.
Sometimes, the exchange can offer a super-affordable deal, but with a super-expensive fee. This makes Bitcoin transactions pretty inflexible and messy. What’s more, fees can eat away all your potential profit and ruin your buy-low sell-high arbitrage strategy.
Finally, don’t forget that crypto gains are a taxable event in Canada. However, similar to other forms of capital investments, you have to report Bitcoin arbitrage gains (or losses) in that tax year only if you cash out the arbitrage profit. If you trade and hold Bitcoin on your exchange account or digital wallet, your holdings won’t be subject to taxes.
The Inability to Establish a Unified BTC Price
Finally, the crucial reason for price inconsistency is the lack of instruments to establish a unified price of Bitcoin in all marketplaces. The thing is that every attempt at price unification requires a third-party delegate, which disrupts the decentralized nature of crypto.
A Beginner’s Guide — What Is Cryptocurrency Arbitrage?
Varying crypto prices across different exchanges give what we call an arbitrage opportunity. The general definition above translates the same in the crypto lingo — a purchase and sale of a cryptocurrency to profit from the inconsistency of the crypto price across different markets.
The process doesn’t sound complicated at all. Technically, it’s one of the simplest trading strategies as it doesn’t depend on bullish and bearish conflicts, and it’s not as time-bounding as day trading. In reality, it’s exhausting to hunt for prices that undergo a change in such short intervals.
Now let’s see a real-life example of the challenges that a Bitcoin arbitrage trader faces daily.
Crypto Arbitrage Example
To illustrate the arbitrage process, we’ll use two popular crypto exchanges, Coinberry and Coinbase Pro. So, imagine that a the time of writing, the Bitcoin price on Coinberry is $29,150, while Coinbase sells it for $ 29,290. The price difference is $140 — an excellent arbitrage opportunity. Ideally, if you buy 50 BTC from Coinberry and sell them on Coinbase, you will earn $7,000.
In reality, this process isn’t that smooth. One thing we can conclude in the beginning is that you do need larger capital for a viable result. Also, you should be registered on both crypto exchanges and have loaded funds on each — get all ready for the upcoming deposit/withdrawal fees before making any move.
Apart from the large investment, restless price monitoring, and transaction fees, Bitcoin “arbitrageurs” can bump into these obstacles along the way:
- The transfer time can take a long time, and in the meantime, the BTC price can change.
- Trading large amounts may require additional verification steps on some exchanges, which also will cost you precious time.
- Since low-price exchanges (your purchasing point) are, by some unwritten rule, low-liquid exchanges, they may delay or prevent the execution of your transaction. If you go large, the low-liquid exchange won’t be able to process such a high-scale order and allow you to get on time to the “selling exchange.”
As you can see, timing is everything in arbitrage trading. You can do everything right, but if you fail to cross these barriers in a favourable time interval, the estimated price difference of $140 will meltdown, leaving you with a financial loss as a result of the multiple transaction fees.
Bitcoin Arbitrage Opportunities and Trading Bots
Now that you’ve learned the arbitrage basics, let’s focus on the process itself. The only way to find different buy-and-sell Bitcoin offers is to compare the BTC/CAD order books of at least two crypto exchanges.
If you’ve already seen how a crypto order book works, you’ll know that it shows orders from the highest bid to the lowest asks. You will also know that it’d be almost impossible to spot an arbitrage opportunity manually, as bid-and-ask orders are changing at the spur of the moment. For that reason, arbitrage traders use various software solutions to detect, find, and convey the arbitrage trade.
Employing a crypto trading bot to perform arbitrage deals reduces the time each trade takes and enhances the amount of executed trades in a given time span. Arbitrage bots make it possible to take the chance on opportunities that are “alive” only for microseconds by taking data in real-time from the API of multiple cryptocurrency exchanges.
The modern trading industry offers a wide variety of crypto bots that among other trading strategies, provide automated execution of arbitrage trades. These are the most market-dominant bots for hassle-free Bitcoin arbitrages. Their distinguishing trait is how many and which crypto exchanges their algorithms use, not the sophisticated technical analysis tools.
|Bitsgap||Binance, Bitstamp, Bitfinex, Bittrex, HitBTC, OKEX, Kraken, Huobi, Poloniex, Livecoin, Kucoin, CEX.IO, DDEX Coinex, Gate.io, Liquid, Gemini, Yobit, Bibox, BigOne, Bit-Z.|
|Pionex||Binance, Pionex, and Huobi GlobalNote that this is the only free arbitrage tool.|
|Cryptohopper||Binance, Coinbase Pro, HitBTC, Kraken, KuCoin, Bitfinex, Bittrex, Bitvavo, Okex, Bitpanda Pro, Poloniex, Huobi|
|Trality||Binance, Coinbase Pro, Kraken, Bitpanda, FTX|
Types of Arbitrage
Crypto arbitrage is a trending activity among avid bitcoiners so don’t be surprised to learn that there are different types and approaches for arbitrage opportunities.
Spatial arbitrage is the most commonly used approach, i.e. trading cryptocurrencies across two different cryptocurrency exchanges. Hence, our use case in the previous section is a typical example of spatial arbitrage. While this is the most straightforward way due to the clear insight into two different order books, such cross-exchange arbitrage is also risky as it exposes crypto traders to additional costs and time regardless of the outcome.
No-Transfer Spatial Arbitrage
To avoid the risks of unnecessary transfer fees in spatial arbitrage, some crypto traders use this arbitrage scenario: they go long on Bitcoin on one crypto exchange and short on another, waiting for the BTC prices to reach convergence on both exchanges. This is how they skip external transfers effectively, but as you can see, this is more complex to manage.
Triangular arbitrage is the most advanced form of arbitrage. In this case, crypto traders make use of price inefficiencies among different trading pairs on the same trading platform. In simplest terms, you buy Bitcoin from the CAD/USD order book and sell it on the ETH/BTC market, for example. The way of profiting is totally the same as spatial arbitrage but the process itself requires a more diversified portfolio and hence, well-developed trading skills to detect where your target crypto is undervalued and where it’s “overpriced.”
A Few Words Before You Go…
Bitcoin arbitrage is a unique business opportunity that allows traders to profit from the imperfection of the data system. It may sound strange that the advanced internet era could allow such flaws in synchronization but when it comes to Bitcoin and other digital assets, price unification isn’t part of the “decentralized package.”
However, you should know that Bitcoin arbitrage isn’t as sleek as it looks in theory. It’s completely legal, less risky than other trading strategies, and doesn’t require profound trading skills, but it can be extremely stumbling and exhausting.
If you’re ready to devote enough time and sweat to crypto trading, Bitcoin arbitrage can be a lucrative opportunity for steady income since Bitcoin prices will always vary across different marketplaces.