Cryptocurrency Arbitrage: Cryptocurrency Arbitrage - a working strategy - Cryptocurrency Arbitrage between exchanges - schemes and trading software
Cryptocurrency arbitrage between exchanges - schemes and trading software
The cryptocurrency market is very volatile, so there are especially many trading risks here - patterns fall apart, technical patterns work apart, and reversals happen almost without preparation. But every cloud has a silver lining, and the aforementioned inconveniences in terms of classic trading turn out to be opportunities such as cryptocurrency arbitrage.
The concept of arbitrage
Arbitrage is operations aimed at profiting from the difference in quotes, related assets. Within an exchange, the imbalance of rate differences is caused by the following factors:
Differences in trading volumes - typically, the higher the volume, the lower the prices. Low volumes are typical for young services with a limited list of assets and/or deposit/withdrawal methods, with high transaction fees.
Scarcity of cryptocurrency on one marketplace and sufficient quantity on another. An illustration is the example at Exmo, where in 2018, when XRP rose due to limited supply from users, the rate rose to 3.5 USD, while on larger platforms it was 2.5 USD, which was instantly taken advantage of by experienced traders.
Disunity of crypto-exchanges due to decentralization of the industry and lack of unified management decision-making systems.
To make sure that there are constant inter-exchange gaps, it is enough to look at Coinmarketcap. Here you need to choose any coin, for example BTC. Click on the ticker, go to the coin's statistics tab and select Markets/Markets. Then you need to build pairs by the ticker:
Markets and Pairs.
As a result, you can observe the picture:
Interchange Rate Difference.
This is a potential opportunity for inter-exchange arbitrage if the liquidity of the venues allows you to execute a trade.
Classical arbitrage involves a chain of transactions made in a single moment when:
an asset is bought cheaper on one marketplace and sold at a higher price on another;
the same actions are performed on three exchanges;
transactions with three or more pairs are made on one market;
transactions are carried out on different exchanges involving one system.
With time gap:
Buying the underlying asset and selling the futures contract;
Playing on linked assets (for example, BTC/BTC and LTC/BTC), when the growth of one pair overtakes the other or vice versa.
Strictly speaking, the time gap, especially in the last example, is out of limits of risk-free arbitrage, because it is accompanied by a large uncertainty share, which, if leverage is used, can nullify the deposit of an inexperienced arbitrator in a very short period of time.
That is why trading between exchanges is accompanied by the postulate:
A trader must know exactly what he is doing and why.
In static arbitrage, profits are made from market inefficiencies:
From multidirectional asset movements with a correlation of 50% or higher, i.e., buying/selling correlated instruments at an above-average spread gap followed by selling when the spread narrows;
from excessively high/low current volatility, relative to historical volatility.
Statistical methods are more risky than classical ones, that is why they are recommended for experienced traders who know how to identify negative odds and positive ones. At the same time, the potential of the latter should exceed the possible risk.
Cryptocurrency correlation tables come and go with the services. They are published on a regular basis at bitinfocharts.com/correlation.html. They include dependencies of cryptocurrencies on various factors and mutual connection of coins.
In practice, it looks different. For example, Bitcoin and Etherium charts are almost mirror-like, although according to the table the correlation between them is only 0.514:
Identity of BTC and ETH charts
By contrast, Bitcoin and Ripple show convergence/divergence with a bitinfocharts correlation of 0.625 - 20% higher than between BTC and ETH, which is perfectly visible in the charts:
When the XRP/BTC pair is connected, experienced traders find presumptive pivot points and trade the instruments separately, for example against the U.S. dollar - buying/selling convergences and divergences.
The conclusion from the mini review of static arbitrage is that these services are just tools that promise nothing and should be subject to healthy criticism.
Searching for the right exchange
The number of cryptocurrency exchanges included in the monitoring lists has crossed the 250 mark. Nevertheless, you will have to spend time to choose acceptable exchanges from this number.
Most importantly, a crypto exchange must have a high turnover. There is no value in a supposedly profitable quote, if the application will hang in the cup for hours. Therefore, the choice can be limited to Coinmarket's top 100, by any parameter - reported volume or adjusted volume:
Sorting by volume.
The top 100 includes YoBit, Livecoin and Exmo, popular among Russian traders. Read more about these exchanges in our articles:
It is necessary to take into account all commissions for deposit/withdrawal and for trading operations. The most expensive fees are for processing fiat transfers. As a matter of fact, there are practically no ways to perform inter-exchange arbitrage with crypto-fiat pairs.
You can buy crypto with no-fees and get a higher profit.
Even exchange codes (e.g., Exmo) will not make the transaction profitable, since the exchange rate is about 5% lower than the exchange rate. Therefore, you should make a summary table with the commissions for further analysis. Usually, it is profitable to make transfers in Dagcoins, Ripple, most coins not from TOP-30. Approximate table:
In addition, Livecoin has fiat currency entry through Capitalist.net for 0%, although within the Capitalist system itself there are commissions.
Similarly, transaction fees for cryptocurrencies not listed in the table need to be considered.
Number of cryptocurrencies.
What matters is not the mathematical number, but a reasonable variety of pairs that include coins from the Top 100, and the duplication of cryptocurrencies between different platforms for inter-exchange arbitrage.
Currencies with low capitalization, which can be seen even visually, should be avoided:
the traps are two:
A sharp adverse change in quotations;
inability to sell the asset because there are no buyers/sellers.
It is necessary not only to outline a scheme, but also to try it out on small amounts, in order to assess how the idea works without interchangeability.
The reality is that there is no universal scheme of operation. There are principles on which each investor builds his own system.
The situation is constantly changing: what worked a year ago is no longer relevant today. Therefore, arbitrageurs are always optimizing their experience and searching for new ideas.
Hedge on futures contracts is a risk-free, but accordingly low-profit way of earning. The underlying, also known as the spot asset, as a rule, trades cheaper than the futures of a future date. One buys the spot, and sells the futures. The point is that by the time the futures contract expires, the price gap tends to be minimal.
For example, on Bitmax the usual difference between the spot and the nearest contract is 130-180 points. At the moments of sharp movements it exceeds 400. You can use the favorable moment and get the immediate profit within 1-2 days, because the gap between the quotes quickly evens out.
An example of a favorable entry lasting a day:
Bitcoin futures for December, profit -1:
Example of a minus position
A perpetual or underlying bought at the same time as the December one with a +2 profit:
Example of a plus position
You can compare the two instruments and find out the usual difference (minimum and maximum) by overlaying the charts in one window or in two windows:
Open/close and maximum/minimum prices are shown when you move the cursor over the candlestick:
Then it will become clear at what difference it is profitable to buy and sell assets.
Another common way to arbitrage on the same marketplace is to make consecutive trades in three pairs with percentage gaps between them:
Pairs with percentage gaps
In this example from the Exmo exchange, the net gap is 0.7%, but the resale to sell is not suitable, because you need to conduct three transactions and for each transaction to pay 0.2% commission. Consequently, the estimated profit will be only 0.1%.
There are also sites where traders make chains of transactions, buying cheaper and selling more expensive - LocalBitcoins.net for Bitcoin and Local.Bitcoin.com for BTC Cash fork.
Simple inter-exchange arbitrage involves buying/selling a cryptocurrency on one marketplace, transferring to another, and a reverse transaction. These opportunities are not often available. It is necessary to take into account the transfer fee and the transaction time of the target crypto-asset, as the quotes can change for a few minutes.
Separately, there is an interesting option to sell Bitcoin for WebMoney dollars at localbitcoins.net and buy Bitcoin at indx.ru - internal exchange of WebMoney system. There are no commissions for the transactions, the expenditure is limited to 1% for the placement of ads on localbitcoin and 0.8% for the transfer of money into the WebMoney system. The scheme is current as of mid-2019.
Complicated variant of interchange trading
A more complicated variant, when funds are distributed between different assets on several exchanges. In practice, it looks like this:
On the first exchange, the trader has C and M assets.
On the second exchange, similarly, there is C and M.
The distribution between the assets is 50%.
At 5% difference in the quotations on one exchange the C/M pair is sold, on the other one is bought.
As a result, at one marketplace you get 100% of C, at the other - 105% of M, or vice versa.
The currencies are transferred between platforms, so that each platform again contains 50% of C and M.
Programs and Services
It is inefficient to monitor stock exchanges manually. Programs - scanners and robots are created for this purpose. The first ones process and display the information, the second ones are set up to conduct independently deals and transactions.
Since scanners do not execute trades, but only register opportunities, further actions must be performed either manually or with additional software.
Site of software developers for arbitrage opportunities detection and automated trading. Scanners - programs that detect trade opportunities are represented by an assortment:
three-pair trading scanner with LiveCoin exchange;
arbitrage assistant for 9 crypto exchanges;
Pamp scanners for Binance, HitBTC and Bitfinex;
Inter-exchange arbitrage software.
The cost of the Interchange Arbitrator scanbot as of July 2019 is 345 USD. The programmer who organized the site is accepting orders for custom product development based on TOR or on an idea.
In 2017 it started as free, developed on donations, and the author of the development commented on the achievements in the forums bitalk.org/threads/13025 and forum.bits.media/index.php?/topic/51362. Then the discussion stalled, and the project moved to http://trd.ai/. For details and terms of cooperation it is necessary to write to the author by e-mail, as the site is closed to casual users.
Interchange arbitrage scanner, shows results in fxsa.org/threads/8290/ branch.
There is another category of market participants who trust the process to robots. Besides arbitrage robots, there are robots with settings for classical trading, paid ones - Cryptotrader, Tradewave, BTC Robot and free ones like Gekko.
A program with many settings, focused on trading. However, it includes the ability to arbitrage trades from three cryptocurrencies within the same exchange.
The internal application of the bot HTS 3.0 Interfac is recommended for use on sites with high volume.
However, the developers concluded that the best results the robot shows when interest in trading is low, as it was in the second and third quarters of 2018.
Now, when order books are densely filled, competition is high and quotes level off quickly, the assistant earns quite modest amounts. You should at least choose exchanges with zero or very low commissions.
One of the most advanced bots. For its development and support uses artificial intelligence. The program is able to make multitransactions, trade on high-frequency strategies and make arbitrage deals. The source code is open, available at https://github.com/DeviaVir/zenbot.
Some users claim to have earned up to 1.5% quarterly revenue.
Optimized to work with MT4 - platform of forex brokers with cryptocurrencies. Focused on static arbitrage, has custom settings. The developers recommend the site jafx.com. The free version is posted on the official website cryptoarbitrager.com.
A startup trading platform for automated cryptocurrency arbitrage, founded in August 2018. Accessed through the official website https://www.arbitraging.co. This project is little known in Runet. Its ARB token is included in the Coinmarketcap ranking, is in the 1200+ place, traded on 3 platforms.
A marketplace for connecting API-keys of the most popular exchanges with the possibility to set up trading strategies and interchange arbitrage according to the Mirror scheme. The service charges 50% profit and is suitable for beginners who have no experience with standalone software. For arbitrage it is necessary to choose cryptocurrencies with fast, cheap transactions. Official website: https://apitrade.pro.
The project was mentioned above as a scanner provider, but there are just as many automated robots here.
Arbitrage Trading Bot.
Read more about bots in the article: Trading bots for cryptocurrency exchanges - overview of desktop and web versions.
Services for comparison
There are also special sites and software for comparing cryptocurrency quotes. In general, their value is questionable (updates every 5-10 minutes or less), so you should not fully trust them with all analytical work:
Bitcoinity - comparing Bitcoin quotes.Bitcoinity dataArbitrage on Bitcoinity
Bitinfocharts - comparing quotes of different cryptocurrencies.Bitinfocharts
Cryptowat - correlation and other data, possibility to form a portfolio.
Bittrex/Yobit Exchange Tool - free software to search for profitable trading pairs on Bittrex and Yobit exchanges with the possibility of buying the Pro-version.
zTrader is an Android trading platform.
TabTrader is a terminal for smartphones.
After selecting the sites, it is necessary to verify the account, where required. Otherwise, the first withdrawal can be blocked for weeks.
It is necessary to keep track of commissions, because on some exchanges deductions for deposit/withdrawal are dynamic and change frequently (Yobit and Exmo).
You should find out in practice how quickly the deposit is credited. Some exchanges claim a window of 20-30 minutes. Therefore, even the lightning-quick Ripple will not appear on the account soon.
What is liquidity can be found out by sending small market and limit orders to the book. Having identified the trading volume of a cryptocurrency that suits the speed and accuracy of execution, you should be guided by these figures when choosing additional venues. Volume is usually translated in Bitcoins.
To make trades, traders make tables where they indicate the value of the lines. After that, it becomes clear what mandatory costs are associated with each transaction. On average, it is recommended to look for the difference for interexchange transactions of 5%, but not less than 2% - if there are no commissions and cryptocurrency transactions are cheap.
It is useful to take into account opening times of Forex sessions, as, traders of fiat instruments more often look into crypto-exchanges - during opening hours of Forex, especially with the opening of the US market is active and there are more arbitrage opportunities.
To trade pairs with Bitcoin at the rate of 10 thousand USD per 1 BTC, you need an initial capital of 1.5 thousand USD.
You need to spend about 10% per trade to save capital - when the minimum deposit threshold is passed.
In addition to these rules, you need to take the risks when setting up trading robots seriously. Because, quite often, a beginner starts with arbitrage, quickly switches to trading deals, removes stops, sends capital to one instrument and suffers crushing losses.
Arbitrage is interesting as a trading method that preserves capital. Unfortunately, there are no recipes for all times - markets change quickly, especially cryptocurrency markets. It is impossible to find the Holy Grail, so, the person who is interested in the very subject of finding opportunities and conducting transactions will succeed.