Reasons for cryptocurrency arbitrage
Cryptocurrency arbitrage has been explained in a previous post. As a trader, there are several reasons as to why you can consider cryptocurrency arbitrage.
1. Many exchanges
There are over 200 exchanges in existence in the market. You can compare prices of coins and tokens on a wide range of exchanges to help you choose coins to trade with and exchanges to trade on. The many exchanges increase the chances for you to exercise pricing arbitrage.
2. Volatility of cryptocurrencies
A look at the market performance of a coin in the last week alone will show you how volatile the cryptos are. The volatility in the market can help you make a profit with low risks for cryptocurrency arbitrage. This will, however, need you to be very keen and ensure your predictions are well thought. By studying the market, you can use other strategies to ensure the market is not against your trades.
3. Fast way to turn a profit
Cryptocurrency arbitrage deals can take place in a few minutes. This is also advised because taking too long to make the trade might lead to losses when the prices in the exchanges change. Therefore, cryptocurrency arbitrage will potentially bring you more profit than other traditional approaches of buying and holding coins to sell at a later date.
4. The infancy of cryptocurrencies
The fact that cryptocurrencies are in their infancy stage means that there is little regulation in trading. There is also a disjoint between the coins and information transfer between exchanges, platforms and industry players is slow. The numbers of traders are also fewer as compared to FoRex trading. These factors increase the opportunities that can be available in cryptocurrency arbitrage.
Risks in cryptocurrency arbitrage
In theory, cryptocurrency arbitrage seems simple and risk-free. But if it was that simple, why is everybody doing it? There are risks and barriers involved that anyone interested needs to know and be wary of. With this knowledge, then you can join and possibly benefit.
- Exchange Fees
Most exchanges charge fees on any trades, miner fees, deposits and withdrawals. you to make a profit, you need to factor in the effects that these fees will have on your trade. The profitability will be determined by the amount of fees that you are required to pay. Always remember that fees will minimize, if not eliminate the profit you expect from cryptocurrency arbitrage
- KYC regulations
Know your customer regulations can pose potential risks to joining exchanges. Sometimes you are required to hold a bank account in the country where an exchange is based for you to place a trade.
- Withdrawal limits
Exchanges often have a limit on an amount one can withdraw from their wallet in a day. If you want to place large trades, it might be hard for you to make profitable arbitrage deals. Make sure you know the limits to the funds you can withdraw before starting cryptocurrency arbitrage on any exchange.
- Slow transactions
Trading volumes in the global crypto market have increased. This can potentially affect the transaction speeds in exchanges. There have been records of delayed withdrawals which can affect someone seeking to profit from arbitrage. Additionally, you should consider the transfer time for all the coins you are trading with since they are different. BTC transfers are slower than ETH transfers. The miner fees are also a considered when a transaction is started. If you choose lower fees for transfer of funds, then your transaction time will be affected, possibly affecting your returns.
- API call rates
There are API call rate limits in many exchanges. This means that as a trader, you can query data at the exchange X times in Y seconds. These limits are different on all exchanges and they limit the actions you can take. You are advised to be attentive on the number of times you send a request because you may exhaust your chances early. There are interfaces that can help you manipulate this but they are very rare. These are WebSocket APIs and FIX sockets.
- API integration
The market does not have a unified or standard definition of what an exchange’s API can do or the data it should have. You are therefore left to study each exchange, understand how they work, know their rates, authentication and how they handle their data types. This is time-consuming and may often be confusing, affecting your cryptocurrency arbitrage profits.
- Failing to execute in time
A risk you should understand in cryptocurrency arbitrage is that the market may shift against you in a matter of seconds. Also, if you delay before executing a sell trade, another trade might take place. Time taken to move coins from one exchange to another can see a rapid change in price.
- Storing coins on exchanges
In order to participate in cryptocurrency arbitrage, your coins will need to be stored in an exchange so you can use them when needed. This is a risk in security as there have been many cases of exchanges being hacked and crypto stolen.
- Large trades
Trading in cryptocurrency arbitrage seems like a very profitable course. However, taking into consideration the fees and delays, profits might be very small. You may, therefore, need to carry out large trades for you to realize large returns.
- Risk of competition
More traders are joining the crypto space. Also, more of the traders are learning and experimenting with cryptocurrency arbitrage. There may be an increase in competition in the future.