What is Crypto Arbitrage? (Profitability + Examples)

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When I was probably 12 I used to mow my neighbor’s yards. They would pay me decent money just to cut their grass, which would grow and grow and grow all summer long. By the end of the summer, I could buy myself some cool stuff, one summer I even saved up to build my own gaming computer.

Anyways, now if I wanted to make money by mowing, I wouldn’t mow. I’m 24 now, so I would go around and find a few little Theodore (that’s me), and partner with them. Maybe I would find someone who wanted their yard mowed for $30, and I would pay the little Theodore $20, this way I’m making $10 each time it gets mowed for hardly doing any work – just setting it up and taking a very small amount of risk.

In essence, I am buying a little Theodore for $20 and selling them for $30… which actually sounds really bad in the grand scheme of things, but the yard owner is benefitting by getting their yard mowed, little Theodore is benefitting by having a job and not having to manage the relationship with the yard owner, and me, big Theodore is benefitting by committing a lawn service arbitrage to profit $10. 

In this article, we are going to explain what crypto arbitrage is, how it works, and briefly answer the question if YOU can make money with it. 

What is Crypto Arbitrage?

Crypto Arbitrage is the term used by traders who earn a profit by buying cryptocurrencies from one exchange and then almost immediately selling the same cryptocurrency to another exchange due to the price difference.

First off, what the heck does arbitrage trading mean? Well, if you think back to our example of lawn mowing, arbitrage trading in crypto means buying low and selling high, or at least higher than you bought. In the case of crypto, it is buying crypto somewhere, and selling it very quickly somewhere else for a higher price. As you will see in our future examples, this usually happens in a matter of minutes and you’re doing it strategically. You’re not hoping the price goes up 10% or falls 5%, if fact the price hardly matters, it only matters in comparison that you can buy it somewhere and sell it for profit somewhere else. 

How does this happen? Well there are liquidity variances between crypto exchanges. This means each exchange has people buying and selling from it, and this buying and selling sets the price of that crypto. In some cases, the price on one exchange is a few dollars different than the price on another exchange. 

This is less risky than day trading or swing trading because I’m not relying on potential price actions – I’m making a profit with current price valuations. Many people call this a “risk-free” trade because you are just finding an opportunity and then making a profit on it. For example, if you found someone who wanted to sell a house for $300,000, but someone who wanted to buy a house for $320,000… you could be the middleman and manage that transaction for the profit – the risk is hardly there because you aren’t owning the whole house. 

So let’s go over some examples.

Simple and Direct Arbitrage

A simple, or direct, arbitrage is the easiest to understand. This is when you buy crypto on one exchange and sell it to another. For example, I might buy bitcoin for $30,000 on Coinbase then transfer it to Binance, where I can sell it for $30,005. That would mean a $5 profit for a few minutes of work, unless I can buy a few bitcoins and then make a little more than $5. This simple or direct method only works for a little bit, until the price on Coinbase goes up because me buying it tells sellers to sell at a higher price. Also, the price on Binance will go down, because less and less people will want to buy from the higher price I’m selling it at. In short, I can’t do this for 10,000 bitcoins, only a few, before the prices are equal and there is no more profit to squeeze out. 

One thing to consider here is the fees and transaction costs. Sometimes sending bitcoin can take up to $20 simply because the network is so popular. Similarly, Binance and Coinbase have their own fees for buying and selling, so you’ll pay them some of your profit. In reality, you can make money using simple or direct arbitrage between exchanges, but there are bots out there (which we will talk about later) that do this stuff all day long. Most arbitrage opportunities are now on smaller unknown exchanges and with more risky, less-developed coins. 

Triangular Arbitrage

Triangular arbitrage is a bit more complicated, but it works and people do make money with it. For this example, we have to get you from thinking in USD. This requires a pair of two tokens that may not be usd. For the case of this example, we are going to use Uni/eth. 

So you buy Uniswap. Then you trade Uniswap for Eth. Finally, you sell Eth. 

This can be tricky to think about, but you are making money from the UNI/ETH exchange. This is a specific exchange pair that tracks the price of these two assets in relations to each other. Many people get confused by this, but you would buy Uni by how many ETH it costs, or vice versa. 

They call it triangular because there are 3 assets – USD, Uni, and Eth. You are making money through a price difference between them somewhere. 

What you don’t realize with this triangle is there are actually 3 pairs. USD/Uni -> Uni/Eth -> ETH/USD. 

Let’s go through an example for people that like numbers. First, let’s set the prices. 

  • USD/UNI -> $20 per Uni
  • UNI/ETH -> 90 Uni per Eth
  • USD/ETH -> $2000 per Eth

Let’s say you go in with $1000. This allows you to buy 50 Uni tokens. 

Next, you trade your 50 Uni tokens for Ethereum. Using the exchange rate of 90 Uni tokens per Ethereum, this gives us .555 Ethereum. Now we simply have to sell that Ethereum for cash. .555 Ethereum can get us $1,111, which is a fun number but it means we made $111, or roughly 11% on our triangular arbitrage. Of course, you might be saying “what if we did it with $10,000 or $1,000,000? Well, due to how exchanges set the prices of their tokens… us interacting with the tokens will cause them to go up and down. This means we can’t infinitely do this – there is only a small margin that we can make a profit on, before the arbitrage opportunity goes away because us, the traders, actually raise the price of Uni since we bought it and lowered the price of Eth because we sold it. 

Is Cryptocurrency Arbitrage profitable?

Yes, it is profitable, people have been doing it for years. In fact, before they did it in crypto, they did it with foreign exchanges and other assets. People are making money to this day by trading the United States dollar to the Yen, then to the Peso, back to the Euro and all day long they are earning small margins with large sums of capitals because of these small price differences across the world. 

In the world of crypto, there are around 200 easy-to-find exchanges where you can write a script to pull data and immediately find price fluctuations that would lead you to profit. In fact, if you go to coinmarketcap, find a coin you like and select “markets” you can see them all yourself. However, the money for people isn’t in these well-known exchanges, the money is in small exchanges that bots haven’t reached yet. Speaking of bots, let’s me share with you what we’ve found about trading bots. 

Arbitrage Trading Bots

Since this is a profitable way to make money, and the way you earn it is by being the fastest to spot an inefficiency, of course people are going to write bots that can do this. In fact, there are tons of bots out there making money from the ideas we’ve discussed in this video. There are even trading sites where you can sign up and find these arbitrages yourself, but they aren’t very popular because the saturation is high since the competition is high because robots can do what we can do much faster and far better. 

In this video, we cannot recommend any advice, but as we have said in other videos – we can say what we will do and will not do. You will not see either one of us trying to perform any crypto arbitrage simply because it is outside our area of expertise and even though people say it’s “risk-less” – we still think there’s risks involved – one of those being the opportunity cost of staring at prices all day when we could be doing something else, also trying to beat a bot written to perform these tasks would be very difficult. 

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