How to Make Money Using Arbitrage

The Three Strategies

There are three basic strategies for making money with cryptocurrencies – although many people engage in all three simultaneously.

The three basic strategies are:

Long term investing (aka HODLing) – holding onto your digital assets for a number of years.

Day/Short term Trading – buying currencies low and selling high and pocketing the difference.

and Arbitrage.

What is Arbitrage?

Arbitrage is the buying  in one market and simultaneously selling it in another at a higher price and then profiting from the difference.

For example, if exchange A is selling BTC for $15000 and Exchange B is buying BTC for $16000, then (theoretically) you would be able to purchase on Exchange A and sell it for a $1000 profit on B.

The strategy carries close to no risk (see below), so if the opportunities can be found, it’s a really simple and easy way to make money.

With so many exchanges around the world, there are many opportunities for arbitrage.

How to Arbitage

Although simple in concept there are few things you need to understand or you could easily end up losing money.

The first thing you’ll need to do is open up accounts on multiple exchanges. Visit here to get started.

The more accounts you have the easier it will be to find arbitrage opportunities.

Once you’ve found an opportunity, it’s really as simple as buying on one exchange and selling the same amount on another exchange.

There are a few risks involved which I have outlined below.

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RISK: Fees eat away at profits

MITIGATION: Understand the fees and only trade when there is a real opportunity.

It’s important that you understand that margins in arbitrage are typically small – perhaps just 1-5%. This means that you’ll need to transfer fairly large amounts of money and coins to make a small amount. If you’re not careful, even these small amounts can easily be reduced to zero or a negative amount by fees.

When assessing an arbitrage opportunity it’s important to understand the commissions that various exchanges charge for buying and selling. For example, Binance charges 0.5% on most trades, so if you’re only making 1% arbitrage, then suddenly your profit has halved.

Second, you need to also understand what the charges are, if any, to deposit and withdraw fiat and/or coins from your exchange.

Only at this point can you assess if there really is an arbitrage opportunity.

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RISK: The price changes before you complete your transaction

MITIGATION: Have cash and coins available on multiple exchanges

Always have coin and cash sitting on exchanges so that you are ready when an opportunity arises. 

Although you could purchase coin on one exchange and transfer it, wait for it to arrive at the other exchange and then sell it, this takes time, by which stage the opportunity may not exist any more.


 

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