Right now, there are more than one thousand cryptocurrency exchanges on the market. Of course, this can be seen as a really good opportunity for some who want to make the most of crypto arbitrage trading.
However, what actually is arbitrage trading, and what are some things to consider when executing this particular approach?
Crypto Arbitrage Trading
Arbitrage refers to when a trader buys an asset from one location, and sells it in another location online to profit from the deviation in price between the separate markets.
For example, Binance is currently trading Bitcoin at $16,000, but on Kraken, its $16,020. This means that if you buy it on Binance and sell it quickly on Kraken, you make a profit of $20.
Naturally, there are many traders out there that love the idea of making a bit of money off of discrepancies between different exchange rates.
However, we don’t suggest that you rush off to turn this minor goldmine into your full-time job. You definitely need to read articles like this one so that you know what you’re getting yourself into.
Just like other money-making ventures out there, crypto arbitrage is not without its associated risks, and there are many things that you will still need to learn about employing a strategy like this, especially if you plan on making a good return from it.
This is why we’re going to go through the common disadvantages to this method.
Projects That Have the Same Name
There are thousands of different cryptocurrency tokens currently floating around out there, but the thing is that a lot of them have similar symbols.
This means that if you end confusing two different currencies when employing the method that we have talked about above, you could end up losing money.
Of course, this might seem like Trading 101, but the reality is that when you are making lots of trades in a day, and doing so quickly, it’s easier than you think to confuse two tokens, and end up trading two different cryptocurrencies completely, that have nothing to do with one another.
One huge disadvantage to this is that most exchanges don’t offer their traders a refund if you make the mistake of sending currency to the wrong wallet address.
So, to avoid making a mistake like this, you need to think long and hard about the volume and price of both options.
If the price on one exchange is randomly low and seems suspect, then this could be because it’s a completely different cryptocurrency to the one that you’re trying to trade.
Of course, the final check involves looking at the symbols of the currency you are trying to trade – if they’re different, then you’re working with two cryptocurrencies, and not one.
Exchanging Wallets Offline, or Through a Different Blockchain
Sometimes, exchanges go ahead and disable the cryptocurrency wallets on their platform either for every client that uses it, or for an individual.
There is a multitude of reasons why they choose to do this, from general maintenance to there being a security risk. Murphy’s law is that it’s going to happen just when you’re ready to make the trade of a lifetime.
Most exchanges out there for cryptocurrency will have a fixed page, where you can locate your wallet whether you are online or not.
Here, they might be able to tell you when it’s going to be online again, so make sure that you check in on this page before you execute any trades.
The second thing that you need to do is make sure that the exchange provides tokens that are being added to the same blockchain.
Sometimes, cryptocurrencies will get moved from one blockchain to another, which is why you need to always double check before you make any trades.
High Withdrawal and Deposit Fees
If you are someone who has been trading for a while now, you will know that if there’s one thing that can be guaranteed of exchange platforms, it’s that they love their withdrawal fees.
While some boast having low withdrawal fees, there are a lot out there that want to try and get as much as they can out of their traders.
This is why you need to make sure that you know everything there is to know about the withdrawal and deposit fees of the platform that you plan on working with.
If you don’t feel up to this, then you could end up losing any potential profit that you have made from your trades before you’ve even been able to withdraw it to your bank account.
To work out this issue, all you’ve got to do is calculate your total expenses before going ahead with an arbitrage trade. You could jot down the numbers on a piece of paper, or even open a spreadsheet.
Lack of Volume
Before executing an arbitrage trade, it’s vital that you check there is sufficient volume for you to execute that trade on your chosen platform.
There are hundreds of cryptocurrencies out there that have now been delisted because the trading volume was too low.
The last thing you want to do is buy up big on a specific cryptocurrency, only to realise that its trading volume is too low and you can’t get rid of it.
The thing about arbitrage trading is that you only need one trade to go wrong to lose it all. When trading, think about the bid price, the ask price, and the depth – these things are so much more important than the previous price.
You can do this by staying on top of the exchange order book, and ensuring that you can see the transactions moving.
Ensure that the transactions are significant enough, and aren’t just minute specks that are being moved around to lull you into a false sense of security.
You will also want to check the volume of the coin every day, so that you can see the volume of the cryptocurrency you are trading from a transactional point of view.
If you can’t find volume through either of these methods, then the currency isn’t worth trading.
Pump and Dump Scheme
The world of cryptocurrency wouldn’t be whole without what is known as ‘pump and dump’ schemes.
This is when traders are scammed by artificially inflating the price of a currency or an asset by feeding false information, surmising fake good news and price action, with the ultimate goal of selling a huge volume of that currency for a huge profit.
There are quite a number of groups out there that exist to execute a scam like this, and sometimes they do really well with it.
One way to check whether you are potentially buying into a scheme like this is to execute a bit of technical analysis. This involves looking at the 1-minute charts and volume, as well as other indicators.
Your Account has been Blocked, or Your Deposit Needs Approval
This happens more than you think in the world of cryptocurrency trading, and if you’ve been in the business of trading crypto for a while now, then you will be aware of people venting their frustrating through social media about when they tried to deposit funds to make a trade, only to have to wait for approval for the deposit, which resulted in missing out on the trade.
Realistically, it can take days sometimes of back and forth for you to get your funds unlocked again, which of course means that you lose hours of valuable trading time.
Honestly, there isn’t all that much that you can do against this kind of thing, but some people have said that they experienced less of it when they deposited smaller volumes of funds, instead of doing it all in one lump sum.
This might be something you will want to consider – the only downside is that you will end up paying more for deposit fees.
The other thing to consider here is that there are some cryptocurrency platforms out there that are unregulated. This means that these platforms can in theory take your assets, and go MIA without explanation.
There are also some horror stories you can find out there of exchanges just shutting down out of nowhere, and not providing users with their funds.
This is a great time to recommend that you keep your funds in a cold wallet. This means that you can retain complete control over your funds, and you don’t have to worry about hackers compromising your assets.
Platforms have a habit – as we mentioned above briefly with withdrawal fees – of adjusting their trading fees all the time, which means that while you might be happy with the trading fee right now, that could all change for the worse in a couple of days’ time.
The only way to avoid this is to check in every day on the fees, and decide what you can afford.
Of course, timing is everything in terms of a good trade. We all know how volatile the cryptocurrency trading market can be, making it less than ideal for arbitrage trades.
Crypto Arbitrage Isn’t the Best
So, we’ve talked about some disadvantages to arbitrage trading, and as you can see, they can become quite a spanner in the works.
In fact, you are probably asking yourself at this point if there’s any point in venturing out there with this type of strategy.
The biggest issue is that you will need to be constantly checking in on your assets and trades, and we all know that nobody has time for this, not even the most committed trader. So, what can you do instead?
The best alternative that we have found to crypto arbitrage trading is a crypto trading bot. Being able to develop and run your own crypto trading strategy that implements your features and has a trading bot running all day and all night for you is a dream come true, right?
Well, it’s definitely possible, and it comes highly recommended. Don’t take the risk of making arbitrage trades, and don’t put yourself through the headache.
Check out a crypto trading bot, and watch how much easier your crypto trades become. Good luck!