Cryptocurrency Arbitrage: Everything You Need to Know

Crypto arbitrage attracts both experienced traders and newcomers. It is positioned as a simple way to earn with low risk, not requiring deep knowledge of technical or fundamental analysis. You can start with any amount, and profits come almost instantly.

In this article, we will explore what cryptocurrency arbitrage actually is and why, despite its apparent simplicity, not everyone can successfully apply this strategy in practice.

This material is prepared by Gate for educational purposes. We hope it helps you better understand the mechanisms of the cryptocurrency market.

What is cryptocurrency arbitrage in simple terms

Arbitrage is the purchase of an asset with the aim of quickly reselling it at a more favorable price on another platform or in another trading pair. For example, an arbitrageur can buy 1 ETH on Gate for $1500 and immediately sell it on another exchange for $1600.

Arbitrage is conducted by both private traders and large market makers. This type of activity is characteristic of all financial markets. Key features of arbitrage:

• Low risk: theoretically, profit can be made without risk, as buying and selling occur almost simultaneously, before the price has had time to change significantly.

• Speed: since prices on the cryptocurrency market change very quickly, arbitrageurs need to make trades in a matter of minutes or even seconds. Often this process is automated.

• Large volumes: as a rule, the yield from a single arbitrage operation is small and rarely exceeds 5-10%, therefore, to achieve significant profit, transactions must be made in large amounts.

Arbitrage is based on price gaps ( gaps ) that occur on different platforms or in different trading pairs due to differences in the balance of supply and demand. This is because each trading pair, and even more so each exchange, represents a separate market where prices are formed independently of others. Arbitrageurs eliminate these gaps, profiting from the difference in rates.

From the perspective of the market as a whole, arbitrage is a useful activity that helps to minimize price gaps and maintain a stable average asset value. Without professional arbitrageurs, it would be impossible to ensure sustainable prices on modern centralized exchanges.

The History of the Emergence of Crypto Arbitrage

Cryptocurrency arbitrage emerged in the early stages of market development when liquidity was low, there were few trading platforms, and capital was heavily fragmented. The price difference of Bitcoin on different exchanges could reach tens of percent due to the absence of large market makers and differences in supply and demand balances. Here are a few vivid examples:

• Huge price gap on African crypto exchanges in 2017. At the Golix platform, the price of BTC was at one point 87% higher than the average on other exchanges. This was caused by the financial isolation of the region and high demand due to inflation of local fiat currencies.

• The Japanese premium for bitcoin that existed until 2018. The high price of BTC on local exchanges was due to the fact that most foreign platforms could not operate in the country due to regulatory restrictions. It was through bitcoin arbitrage that the company Alameda Research was able to grow, later launching the crypto exchange FTX.

• Kimchi Premium: the difference between the value of cryptocurrencies on Korean and global exchanges. The reason is the same as in the case of Japan - strict regulation for international platforms. Interestingly, the Kimchi Premium still exists, although it is not as noticeable as it used to be.

Before the emergence of professional market makers and the influx of large institutional capital, arbitrage opportunities were available to regular traders as well. However, starting with the bull market of 2017, more or less profitable arbitrage on centralized exchanges shifted into the hands of market makers, who can respond more quickly to price gaps through automation and trade more efficiently on an international scale.

Types of Arbitration

There are several types of arbitrage that differ in the scale of transactions and the number of platforms involved:

• Intra-Exchange: executing trades on the same platform but in different trading pairs. The main advantage of this method is speed, as there is no need to transfer cryptocurrency between exchanges. Buying and selling can literally take seconds.

• Inter-exchange: implies buying an asset on one platform and selling it on another. This is a more complex method as it requires having accounts on both exchanges and transferring funds between them, which involves additional fees and time delays.

• International: arbitration transactions using trading platforms in multiple countries, as well as local payment methods and fiat currencies. The most complex type of arbitrage.

As a rule, the larger the scale of the deal, the more platforms and assets are involved, which complicates its implementation.

It is worth highlighting arbitrage on decentralized exchanges (DEX), the mechanism of which differs significantly and is built on liquidity pools, slippage, asset value in different networks, and even the order of transactions in the mempool. This is a broad topic that we will discuss in a separate article.

How P2P arbitrage is carried out

A special type of arbitrage is arbitrage on P2P platforms. The main feature of P2P trading is that the price of the transaction is set by agreement between the participants. This means that the price of a direct transaction may differ from the market price:

• The market value of BTC when purchased through the order book on Gate can be one.
• At the same time, the selling price of BTC on the P2P platform when paid through a specific payment system may be different.

Thus, you can buy BTC cheaper directly on the exchange and sell on P2P if the payment method suits you. This works the other way around as well: the price on P2P can sometimes be lower than the market price, although this happens less frequently.

A more complex version of P2P arbitration involves independently placing advertisements for buying or selling. In this case, the trader sets the offer price themselves, which may differ from the market price in one direction or another. For example, one can buy BTC below the market price and then sell on the exchange or at another offer already at market value.

It is important to understand the reasons for price discrepancies. A user may be willing to sell below market or buy above if they receive additional benefits, such as working without KYC, direct withdrawals without fees, or exchanges for rare fiat currencies. Therefore, before starting to work, it is necessary to study various P2P platforms, their prices, and the main advantages for users.

Arbitrage Links: Structure and Action Algorithm

In practice, arbitrageurs operate through so-called arbitrage pairs - algorithms that describe where and which asset to buy and where to sell in order to profit from the price difference. The simplest arbitrage pair might look like this:

1. Buy ETH at price X on the P2P platform Gate.
2. Withdraw it to a trading wallet of another platform;
3. Sell on this platform at price Y.

However, usually the pairs are more complex and can include up to 10 or more intermediate trading pairs and platforms, as well as providing for the use of foreign fiat currencies or combined trading on centralized and decentralized exchanges.

The execution of all actions from a bundle is called a circle. The profitability of the bundle is assessed in percentages of the invested funds that were managed to be earned by the end of the circle. For example, if the yield is indicated as 15% - this means that the trader can earn 15% of their deposit in 1 circle. Ideally, the bundle is structured so that the income from the previous circle can be used in the next one, gradually increasing the deposit and the amount of profit.

The main task of an arbitrageur is to detect imbalances in different markets and build an arbitrage connection. To do this, traders use bots, scanners, or regular data aggregators.

Scanners and tools for arbitrage

Order books and blockchain transactions are publicly accessible, which means that price data across different markets can be aggregated and analyzed to uncover arbitrage opportunities. The most accessible and straightforward sources of information are data aggregators:

• Cryptorank offers a separate "Arbitrage" tab on the page of a specific cryptocurrency. This tab displays price gaps when trading on different platforms. At the moment, this is one of the most convenient free tools for tracking pairs.

• CMC provides a complete list of markets for each currency, allowing to monitor the exchange rate difference across different trading pairs and various crypto exchanges.

• Dexscreener allows you to track liquidity pools for a selected pair or coin, which means you can also see the exchange rate difference in these pools. However, it is important to consider that the pools themselves may be deployed on different DEXs and even on different networks.

Monitoring price gaps and building pairs manually requires a lot of effort and time - a resource that arbitrage traders have the least of. Therefore, many traders use special scanners that allow them to automatically or semi-automatically detect pairs and trade on them.

Such software can be paid or free, which directly affects its functionality. Thus, free versions mainly provide exchange directions and can send notifications to social networks. More complex software involves trade bots and trading through APIs to immediately utilize the discovered pairing.

( Additional sources of information

In addition to open data aggregators and specialized software, arbitrageurs, especially newcomers, use other sources of information to find connections:

• Telegram channels with various bundles, schemes, and signals: as a rule, such channels provide information with a delay or try to sell their product to the audience.

• Closed communities and private groups: there are also closed chats, groups, and servers for this area of activity. Sometimes they can offer more up-to-date information than public sources.

• Other social networks: niche influencers on Twitter often publish information related to arbitrage and bundles.

The reliability and relevance of such data depends on the source. As a rule, early access to truly working connections needs to be paid for, and of course, no one can guarantee how long a particular direction will be profitable. Therefore, it is important to learn to build connections independently and analyze the market in search of opportunities.

An alternative to signals and ready-made bundles are also courses on arbitrage from influencers and traders. Often, they include information from open sources, however