Why cryptocurrency price arbitrage is not suitable for beginners, what are its features and what you need to pay special attention to
Traders use the difference in quotes on cryptocurrency exchanges in their own interests. This way of earning money is called arbitrage, and its meaning is to buy an asset cheaper on one site and sell it at a higher price on another. In theory, the concept looks simple, but in practice there are a lot of nuances that can ultimately deprive a beginner of a deposit.
Not for beginners
Arbitration of cryptocurrencies is more suitable for "sophisticated" traders who may be new to the field of digital money, but already have experience in trading other assets, says Sergey Troshin, head of the Six Nines data center. Maxim Krupyshev, CEO of the crypto payment system Coinspaid, speaks about this. According to him, now no one is engaged in manual arbitrage, for this they use trading bots – programs for automatically concluding transactions according to predetermined conditions.
The most famous and profitable funds are most often engaged in arbitrage, and this reduces all activities to a technology race, Troshin explained.
“For arbitrage, you need experience in writing a connector (software for connecting to a platform where assets are traded) to the exchange and trading strategies, as well as the ability to write good software for yourself and use good servers,” Troshin added.
The leading strategist of EXANTE Janis Kivkulis agrees that arbitration is not suitable for those who are taking their first steps in the market. The difference in the rates of liquid instruments on the stock exchanges is "negligible", therefore large sums of money are required for significant earnings in arbitration. In addition, it is difficult for private players to compete with large institutional investor companies that use robotic schemes to track profitable patterns.
Features of cryptocurrency arbitrage
One of the features of price arbitrage in the cryptocurrency space is the regular appearance of new sites that competitors do not yet know anything about, says Troshin of Six Nines. In addition, a situation with privileged access to exchanges is not excluded, because a trader, for example, got acquainted with the owner of the site, and may agree that his access will be a little faster.
“Nobody regulates this industry, there is complete anarchy here,” the expert added.
At the same time, according to Troshin, any large trader can influence the quotes of one of the exchanges, since the markets have huge volatility and little liquidity. This leads to situations for arbitrage more often, but at the same time the volumes are less.
Types of arbitration
The most accessible type of arbitrage is considered to be statistical, which can also be called pair trading, says Vitaly Kirpichev, Development Director of the TradingView platform in Russia. The point of statistical arbitrage is to find instruments with a high correlation with each other. This type of arbitration can even be carried out manually using the existing functionality of trading terminals. Another type of arbitration is intermarket.
“Intermarket arbitrage is when you see the difference between the prices of one instrument in different markets and go long on one and short on the other at the same time. As soon as this difference becomes zero, you close both positions, ”Kirpichev explained.
In practice, such arbitration operations require a very fast communication channel and special software, he added.
There is also a calendar arbitration – it is more accessible and also involves the opening of two oppositely directed positions in contracts with different expiration dates. For example, buying April Bitcoin futures versus selling May Bitcoin futures. Thus, trading takes place not with a separate instrument, but with the difference between them, or the spread. Before the expiration of the April contract, you can “catch” small fluctuations in such a spread. However, such work will also require at least good software, because it is impossible to do it manually, the expert warned.
What you need to enter arbitration
To find the first successful entry points, you need to start tracking rates on different exchanges, as well as learn to predict their dynamics, says Artem Deev, head of the analytical department at AMarkets. He also recommends that you study the commissions of various sites before making transactions in order to really make a profit. Experience with working on different crypto-exchanges will be required in order to take into account their peculiarities and the speed of transactions, since during arbitration all actions must be performed as quickly as possible.
Crypto-exchanges, on which the rate is very different from the average market, are often either fraudulent or have certain problems, says Maxim Krupyshev – it will work out to bring money to such sites, but returning them back is no longer a fact.
When working with trading bots, Krupyshev advises to be as careful and accurate as possible, since it is very difficult to choose an automated system for arbitration. In addition to the fact that each individual bot works with a different set of platforms, there are a large number of fraudulent bots on the market that take away their earnings from newbies, Coinspaid CEO explained. He added that it will be difficult for a newbie trader to conduct a minimal technical audit to test the bot for fairness.
Another point worth focusing on, according to Krupyshev, is the internal rules of exchanges. In addition to commissions, there may be other restrictions, for example, it is not possible to withdraw purchased assets from every site in a few minutes, the expert says.