Monitor the markets for price differences, and then place your trades and transfer funds accordingly. this is the most basic approach to cryptocurrency arbitrage is to do everything manually .
However, there are several cryptocurrency arbitrage bots available online that are designed to make it as easy as possible to track price movements and differences. Online or mobile trading apps, such as Blockfolio, can also simplify the market monitoring process.
There are multiple strategies arbitrage traders can use to make a profit, including the following:
- Convergence arbitrage. This approach involves buying a coin on one exchange where it is undervalued and short-selling the same coin on another exchange where it is overvalued. When the two separate prices meet at a middle point, you can profit from the amount of convergence.
- Simple arbitrage. Buying and selling the same coin immediately on separate exchanges.
- Triangular arbitrage. This process involves taking advantage of the price differences between three currencies. For example, buy BTC in USD, sell it to make EUR, and then exchange those EUR back to USD.
If you’ve thoroughly researched how arbitrage works and you understand the risks involved, keep the following tips in mind before getting started:
- Don’t transfer in BTC. Speed is of the essence when doing this type of trading, so BTC’s slow transaction time could hurt your chances of making a profitable trade. You may want to consider using ETH, which offers faster transactions, instead.
- Have a plan. There are several key questions and factors you’ll need to consider before starting. For example, how much money should you put in? Will the percentage difference between prices represent a sufficiently profitable opportunity? Will you keep a balance of coins on multiple exchanges, or transfer your funds around as needed, thereby increasing delays?
- Look for new listings. Keep track of crypto forums and news sites for announcements of a new coin being added to an exchange. If a coin has only been recently added to an exchange, and there’s only limited demand for the coin on that site, you may be able to find a larger price differential.
- Only use trusted exchanges. While there’s always a certain level of risk when dealing with any crypto exchange, do plenty of research beforehand to make sure you only deal with reputable sites.
- Monitor the market. There’s a greater chance of price differences during periods of market volatility, so monitor crypto markets for any news and developments that could cause rapid price changes.
- Hedge. To protect against sudden market moves that aren’t in your favor, it’s worth reading up on hedging strategies and how to use them.
- Diversify. Channeling your money into only one exchange or one particular cryptocurrency is risky. Spreading your money around can help to minimize risk.
- Limit your exposure. Never arbitrage an amount that’s more than you can afford to lose. With so many potential risks that could lead to a loss, it’s always a good idea to play it safe.