What Makes Cryptocurrencies Attractive
Why does cryptocurrency trading become more and more attractive in spite of all the drawdowns the market faces?
Why do investment companies, financial institutions and traditional traders take a serious look at cryptocurrency trading?
The reasons may include the following:
- Cryptocurrencies offer various money-making opportunities. It is not just “buy a Bitcoin and wait for it to grow” strategy.
- An additional instrument is always an asset. Investors are seeking for ways to diversify their portfolios by including commodities, stocks, foreign currencies, etc. Now, cryptocurrencies take a stand as a financial instrument as well.
- Cryptocurrency markets operate based on the same market laws as other instruments. In this way, similar analysis techniques, tools and strategies can be re-applied.
As the additional opportunities and money-making strategies are partially a legacy of traditional ‘old-fashioned’ markets, they can be reused in the new settings and environment of the still-developing cryptocurrency market.
One of the trading strategies that comes from the foreign currency trading and that can be reused in cryptocurrency trading is crypto arbitrage.
Arbitrage Trading In Short Terms
Arbitrage in general is a type of trading in which a trader tries to profit from discrepancies in the prices of identical or related financial instruments. The price fluctuations in any financial market are driven by changes in supply and demand. The aim of the arbitrage trading strategy to spot the differences in the fluctuating prices from different financial institutions or across the traded instruments and take advantage of the moment when such discrepancies are big enough allowing the trader to make a profit. Such a moment (a market situation when such discrepancies appear) is known as an arbitrage window.
Speaking of some traditional currencies trading examples:
Bank A is buying EUR for $1.1295 and selling at $1.1300
Bank B is buying currency EUR at $1.1310 and selling at $1.1320
In this hypothetic example, a trader can buy EUR from Institution A at $1.1300 (receiving 884,955.7522 EUR) and then immediately sell it to Institution B at $1.1310 (receiving 1,000,884.9557 USD) taking advantage of this rate discrepancy between two banks (0.0010 USD). As in the example above, with the initial $ 1,000,000 the trader can get $884.9557 after the last transaction.
Triangular arbitrage involves exchanging three currency pairs and can be performed within the same exchange.
For example, the trader has 1000 LTC and the market offers an opportunity for crypto arbitrage for the following currencies with the following rates:
- The 1st step is to buy BTC (sell LTC at Bid price). For 1000 LTC the crypto trader gets 9.016 BTC.
- The 2nd step is to buy BNB (buy BNB at Ask price). For 9.016, the trader gets 7131.783 BNB.
- The 3rd step is to convert the funds back to LTC with a profit (buy LTC at Ask price). The selling of 7131.783 BNB results in 1 121.35 LTC. It is 121.35 LTC more than before the arbitrage transactions.
The triangular arbitrage can turn to four or more currencies arbitrage if it involves more transactions with more currencies.
Also it becomes inter-exchange arbitrage if more than one exchange is involved. It is a rare case when all cross-currency transactions are performed at one exchange. They usually involve the best rates offered by different exchanges.
What Can Be Required For Arbitrage Trading?
Based on the definition and arbitrage examples, we can come to a conclusion the arbitrage trading requires the following:
- Availability of multiple trading instruments in the market. The more limited the number of instruments is, the more limited are the opportunities for arbitrage.
- Access to multiple exchanges or trading institutions. The trader should be able to get real-time quotes and buy-sell from multiple exchanges or institutions to increase the chances of catching the right moment to realize their arbitrage trading strategy.
- Presence of price differences across the instruments and exchanges that can be used for arbitrage trading. The price difference should be rather significant to make it reasonable to go for the arbitrage trading opportunity. It is not purely the price difference that should be taken into account but also the trading-associated fees and payments.
- Availability of a trading tool or a platform that allows the trader act really fast taking advantage of the moment. As time really matters in arbitrage trading, it is extremely important to be able to execute any transactions instantly.
As arbitrary trading has been successfully implemented by traders in Forex for years, can it be as successful with cryptocurrencies?
Is Arbitrage Possible In Cryptocurrency Trading?
Can all these prerequisites meet in cryptocurrency market environment?
Of course they can and there is more to say: the chances of making more money on arbitrage trading with cryptocurrencies are higher than in traditional foreign currencies market.
Let’s take a closer look at the required conditions one by one shifting them to cryptocurrency settings.
Availability of multiple trading instruments.
Although there is no clear dependency between the number of instruments and the chances for the arbitrary window to happen, it is like having more cards to play with. Let the statistics speak for itself: currently, according to CoinMarketCap, more than 5200 cryptocurrencies are listed for trading. Since cryptocurrencies are not as limited as traditional government-authorized currencies, their number is expected to grow.
Access to multiple exchanges or trading institutions.
This actually means access to different quotes and ability to perform trades at these quotes. Availability of a limited number of quotes, limits the possibilities for arbitrage trading. For example, every bank, which buys and sells currencies tries to correct its exchange rates to eliminate the possibilities of triangular arbitrage (see Example item 2 above). On crypto exchanges, the quotes are usually also get adjusted very quickly. As soon as the crypto arbitrage window opens, traders try to realize the arbitrage opportunity. After it gets spotted by many crypto traders and the demand for the related currency grows, the price gets corrected by the market to its equilibrium. The advantage of the cryptocurrency market is that the number of traders and exchanges grows thus providing the variety of quotes to track. To spot the best quotes for crypto arbitrage trading, it can be especially helpful to have a cross-exchange crypto trading platform with good cryptocurrency price monitoring tools.
Presence of price differences.
It is required to find the situation when such discrepancies in prices can allow the crypto trader to profit from arbitrage trading. As mentioned in item 2, the market tries to equilibrate the price based on supply and demand, and stable and steady markets are not that attractive for arbitrage as it uses price inefficiencies. The advantage of the cryptocurrency market in this case is that it is young, fast-growing, volatile and decentralized. Cryptocurrencies can be overestimated or underestimated in different countries or on different crypto exchanges. These situations can be of great benefit to crypto arbitrage traders. However, not just the fact that the price differences occur, but the amount of the difference should be considered. The amount of transaction fees and other payments can overlap the profit from the crypto arbitrage transactions making them useless.
Availability of relevant cryptocurrency trading tools.
In the current quickly changing environment the challenge is not just finding an arbitrage opportunity but the ability to realize it. It seems almost impossible to manually perform several inter-exchange transactions or close short-long positions for several instruments in a very short time frame when the crypto arbitrage window may stay open.
Challenges of Cryptocurrency Arbitrage
For example, to use an inter-exchange arbitrage trading strategy a cryptocurrency trader should:
- Be registered on at least two exchanges
- Buy cryptocurrency at least on one of them
- Transfer the bought cryptocurrency to the other exchange
- Sell the transferred cryptocurrency
Then, the crypto arbitrage trader faces two challenges:
- Not to miss out the chance when the arbitrage window opens. It means that patience and focus are required.
- Manage to perform the transactions quickly. The situation may occur that by the time your crypto funds get transferred to the other exchange, the price changes making the selling unreasonable. Therefore, time is extremely important, and the possibility to perform transactions immediately is what the crypto arbitrage traders really need.
Other challenges include:
- A high barrier to entry. Of course, you can start trading with as low as $100 but you cannot expect much in this case even with a good arbitrage opportunity. Usually, arbitrage traders start with at least $1000/5000. At the same time, keep in mind that any trading bears certain risks.
- High fees. Cryptocurrency exchanges have their commissions and fees for withdrawal and transfer of funds, and they can be rather significant. Arbitrage trading is not limited to one crypto exchange, therefore the fees may be charged by several sources. In these settings, it is better not to start the arbitrage trading when the possible profit is less than 2%, otherwise the expected profit can easily vanish after applying all charges.
Torex Crypto Arbitrage Tool
Conventional currency trading has developed a variety of different tools helping the traders: from pre-trading analysis to fully automated trading and post-trading analysis.
Tools can be helpful while crypto trading. Speaking of crypto arbitrage, crypto traders can consider the following:
- Inter-exchange price monitoring tool to provide real-time valid currency rates. Here, a wide range of notification functionalities can be an advantage.
The example below is a Torex Price Checker tool allowing to select exchanges and crypto pairs to monitor:
The picture is an example of a Torex Price Checker tool for Binance, Bitfinex, and BKEX crypto exchanges; and the sell rate for the selected pairs: BAT/ETH; ETC/BTC, ETH/BTC.
- An automated crypto arbitrage tool that is able to detect the arbitrage opportunity and realize it with minimal manual/human involvement. Currently, compared to the fiat currency trading, the crypto trading market players are still developing good crypto-specific auto-trading software. (As for the Torex.One Arbitrage Tool, it operates in manual mode.)
- Crypto arbitrage tool can:
- Have the settings allowing to trade in multiple exchanges;
- Allow monitoring the lowest/highest crypto rates at selected exchanges with predefined minimum daily volume and minimum order volume;
- Calculate possible profits to catch the moment when arbitrage becomes reasonable in terms of fees and charges.
The picture is an example of Torex Arbitrage Tool for selected exchanges: Binance, Bittrex, and the lowest/highest rates found for the pairs that can make about 0.75% profit (transfer fees and other commissions of crypto exchanges are not accounted).
- A universal cryptocurrency trading solution tool providing access to multiple exchanges at one place and allowing immediate transactions between the exchanges. A crypto trading platform that can combine the tools described above and many other functionalities the trader needs can make a revolution in the crypto trading.
- Additional tools: such as price notifications (via email or messengers), statistics tools to collect and analyze, etc.
You can consider Torex.One crypto trading platform. Torex.One supports API trading on currently nine supported crypto exchanges (Binance, Bittrex, BKEX, Crex24, Coinsbit, Huobi, Poloniex, Bitfinex and KuCoin).
How to search for crypto arbitrage windows with Torex.One Arbitrage Tool:
- Select at least two exchanges.
- If a trader wishes to exclude from the analysis tokens with insignificant trading volumes and, subsequently, low liquidity, the value in the “Filter orders on minimum daily volume” field can be set.
- Optionally, traders can filter currency pairs by the minimum % of expected profit. That value does not include any transactional commissions implied by crypto exchanges.
- Optionally, traders can set the desired arbitrage volume (in BTC equivalent) in the “Consider minimum order volume” field.
- After clicking on “Analyze” button, Torex Arbitrage Tool starts searching for arbitrage windows. If arbitrage windows are found, the table with results will show the lowest price of the currency pair that can be considered for purchase on one exchange, the highest available price of the cryptocurrency pair to sell on another exchange, and the price difference in %. In case the inscription “No suitable deals at the moment.” is shown, traders can amend the previously selected settings.
Crypto Arbitrage Trading Tips
The tips for crypto arbitrage trading depend on the knowledge and skill level the trader has. No special crypto trading skills are required; however, trading experience is definitely an asset.
The following general tips can do some good for those who are new in crypto trading:
- Educate yourself and assess the risks with necessary caution. Crypto arbitrage can potentially make sufficient profit. Traders can start small to better understand how crypto arbitrage works. Traders need to learn necessary information before entering into crypto arbitrage transactions.
- Keep your funds in several cryptocurrencies. Traders prefer keeping their funds in at least two currencies. Some go for three. In general, it reduces risks when quotes show unexpected fluctuations. And in terms of crypto arbitrage it can eliminate the need to buy the currency affected by the arbitrage window opened.
- Select exchanges carefully. There are about 300 cryptocurrency exchanges but there is no need to track of all them. You can select some of them with acceptable liquidity to be able to fully and simultaneously monitor their quotes.
- Calculate fees and consider transaction time. The effect of the transaction fees and exchange commissions is great as previously noted. The time required for transactions also is very important as it can delay or fully blow your transaction resulting in losses. Note that Bitcoin, although it is very popular, is not good for quick transactions as the blockchain used for Bitcoin is able to process a rather limited number of transactions per second.
- Find your crypto arbitrage trading platform. Different software can make your trading life much easier. Find the right one for you in terms of functionalities and user experience it offers, and your trading objectives.
- You can consider opening a trading account at Torex crypto trading platform.