Tutorial: Arbitration from A to Z

How to trade arbitration strategies on cryptocurrency exchanges.

There are several ways to trade, which differ in possible risks of losses and the minimum required number of coins.

Let us start our explanation with simple options to complicate gradually.

The golden rule of trade. Buy cheap, sell more expensive.

Among the many different exchanges and coins, it is possible to find a coin that will be cheaper on one exchange but more expansive on another. All is needed to do is to buy a cheaper coin and send it to another exchange, selling it for a higher price there. This strategy is called intermarket or cross-border arbitrage.

In order to be guaranteed to make a profit, do not forget to take into account all expenses, i.e., transaction fees and fees for the transfer of coins between exchanges.
More over, be sure to make sure before the transaction that a coin may be sent from one exchange and credited to another. Very often, a significant difference in prices occurs when coins cannot be transferred from one exchange to another, which is reasonable; in this case, trading arbitrageurs cannot equalize prices between different trading platforms.

As an example of an arbitrage transaction, let us look at the spreadsheet (price differences) in the Cryptoroute service; right now, at the time of writing this text, it is possible to buy ETC (Ether Classic) at Poloniex for USDT 18.21 and sell it at Gate for USDT 18.51. Thus, having earned 30 cents of gross profit from one coin. For thirty cents, I am not ready to hit the keyboard with my fingers, so I need to invest at least $600 in the transaction to make the gross profit of $7.18 and net one of $7 after paying charges and fees. Which amounts to 1.16%, a very significant profit by arbitration standards. After all, this is only one transaction, ETC processing is very fast and in a few hours we can make at least a dozen such transactions, which is 11.6% or $69, you may convert this amount in your currency at the current rate.

Now it is time to spur your horses. You probably already guessed that the second half of the cash flow is missing in this scheme; after making a profit, we need to return the money back from Gate to Poloniex to buy cheap coins and send them for sale again.

What options do we have?

The easiest way is to find a coin that will cost less at Gate than at Poloniex, thus, it turns out that each time we make only profitable transactions, which is called earning there and back.
This does not always happen, usually, on an exchange with higher prices, all coins are expensive, so you need to find a coin with the smallest price difference and donate part of the profit to return money to Poloniex.
The second option is to use the USDT transfer if both exchanges support it. it is required to transfer an amount at a time sufficient to compensate for the transfer price, which is $25 now. It is clear that $25 of costs for a profit of $7 is inadmissible, so you need to increase the amount of funds in the transaction at least 5 times, up to $3,000. Then, we will earn $35 per transaction and $10 more than it was initially will be returned to Poloniex , which is a hundred bucks for ten transactions. Not a bad profit.

Being a crypto arbitrage trader is a profitable story!

Another way to arbitrate with coins.

Trade a pair, in which the coins are quoted not to the dollar but to the bitcoin (BTC), ETH, QTUM, etc. In this case, the profit will be expressed as an increasing number of coins. For example, take a pair of ZEC/BTC at the Yobit and Hitbtc. exchanges. At Yobit, ZEC is traded for BTC 0.0275, and at Hitbtc , one ZEC costs 0.0280 bitcoins or 5 thousandths higher. Thus, following the trading sequence, the purchase of ZECs for the BTCs at Yobit with the subsequent sale of ZECs for BTCs at Hitbtc, and the purchase of ZECs again at Yobit will bring us a ZEC 0.014 margin.

> Zeros after the decimal point are too many and it is difficult to make out significant numbers but to compare with mining today, a day of operation of a farm with 4 GTX 1060 cards is required to obtain ZEC 0.01.

Time spent on a transaction is 40 minutes; Bitcoin and ZEC are not the fastest coins in the crypto family.
The minimum number of coins in one transaction for a steady profit is limited by the cost of transferring bitcoin between exchanges since the transfer fee is a part of bitcoin and the profit from one coin is very small, it is required to calculate all the profit to the cent before each transaction, otherwise, it is possible to screw up. Our example shows that transferring BTCs from Hitbtc to Yobit costs BTC 0.001 and all our profit is 0.0005, which means that the break-even point will be reached when trading three ZECs at a time and to get profit, at least 4 pcs. are required.

It is possible to use a military trick, to send another coin between exchanges, for example, LTC, instead of bitcoin.

The point is that the losses from buying and selling LTCs are less than the transfer fee for a bitcoin; and if LTCs are transferred as well with a profit, we will be rolling in clover.
Of course, schemes with four buy-sell transactions and two transfers between exchanges are not simple and clear; they are easy to get confused but our Cryptoroute service is intended for this purpose, to help you find the most profitable options for trading in real time, taking into account the price behavior of all coins.

Complicating the crypto trade.

As the great theorist of capitalism Karl Marx taught, The formula for turning money into capital is the following:


We will adjust it a little to serve us with the goal of increasing crypto capital.

And here is the secret formula: “Money-Commodity-Commodity-Money,” which is not a very significant difference from the original, right?
Now, I will tell you how to use it.

One of the advantages of crypto exchanges is a huge variety of instruments for trading, including with the same coins but quoted to other different coins. For example, ETH to USDT and ETH to BTC, and BTC is also quoted to USDT. Thus, we may express the price of ETH to the dollar not only directly through the ETH/USDT pair but also through a synthetic instrument (i.e., not a real one but compiled as a result of a mathematical operation with other instruments) of ETH/BTC and BTC/USDT. Under ideal conditions, these two ETNs should cost the same amount in dollars but to our arbitrage pleasure, this is not so.

The difference in prices, our profit, may be caught both inside the exchange and between different exchanges. For example, my favorite DOGI coin at the Poloniex exchange is not trading for USDT but, having bought Bitcoin for USDT and exchanged the received Bitcoin for DOGE, we may send them, for example, to the Gate exchange, where DOGI may be sold for dollars.
Now you can buy 0.1203508 bitcoin for $1,000 and trade it for DOGE 300,877 at the rate of 0.00000040; at the Gate exchange, we will get $1,019 for 300,875 (minus 2 pcs. for the transfer), i.e., almost 2% of the profit. The interesting point is that if you sell DOGE at Gate for bitcoin, then there will be no profit because the price is the same as at Poloniex. It is all about the difference in bitcoin prices in dollars.

The maximum price difference between exchanges can be found on those coins that are quoted to only one of them, for example, on the popular Binanceexchange, almost all coins are traded only for bitcoin and ether, therefore, there is not much competition on the side of internal arbitrageurs who would equalize the price of the coin per dollar and bitcoin. So, having bought coins on another platform and sold them for bitcoin at Binance, we are likely to be able to make a profit.

Real arbitrage traders do not hope for a miracle but they use the transaction map function in the Cryptoroute service; this function allows simulating a transaction step by step and calculating the profit from the transaction taking into account all the associated costs.

Trade only with profit, trade with Cryptoroute!

It's time to talk about the risks of cryptocurrency arbitration trading and how to mitigate them.

Any exchange trading is fraught with risks. Of course, arbitration strategies are the least risky among all but they also have dangerous spots. We will learn how to cushion the blow.
The main risk of cryptocurrency intermarket arbitration is a change in price in an open position.
For example, you bought a coin for 10 units in order to sell it for 11 units but for the time the coins were transferred from one exchange to another, its price dropped to 9 units, then you got a loss instead of profit.

The perennial l question arises. What to do?

The easiest wayis to split your account into two halves, between exchanges. At the exchange where you will buy coins, you have Dollars or BTC, and at the one where you sell coins, you have a traded coin.

For example, we trade ETC, we buy it at Huobipro, we sell it at Gate
The first step is all the money at Huobipro, we buy ETC for half of the amount and transfer them toGate. Further, we place an order for the purchase of the second half of ETC at Huobipro and an order for the sale of coins at Gate. Be sure to monitor the price difference, if the order is fully executed at one exchange, then it is required to close the transaction at the other exchange immediately to equalize the volume. It does not matter if you lose a part of your profit by executing the market order, the balance is a matter of importance.
As soon as all orders are executed, we transfer the purchased coins from Huobipro to Gate and the money from Gate to Huobipro. We repeat the cycle as long as the profit from transactions remains.

Performing this simple operation constantly keeps us at current prices while avoiding losses. Because if the price dropped and you would sell coins for a smaller amount than you bought, then you would buy more coins at a lower price for the second half of the money. In the case the price increased, at one exchange, would buy fewer coins since the price for 1 coin is higher, but at the same time, you would sell existing coins at another exchange more expensive, for a larger amount, as a result, you would have a constant increase in the number of coins and money..

The second way is to limit the risks of price changes during the transfer of coins.

Cancellation of the movement of coins from the exchange to exchange sounds like the treatment of a headache with an ax but nevertheless, it works.
And here is how it works.

I have given so far examples of arbitrage of the absolute price but there is still a relative price or its change to be more precise. Typically, this method is used by "adult" futures and options traders but it may be useful to us as well.

The point is that, at the moment, the price difference for some kind of coin between the two exchanges is 50 cents. We sell the coin at the exchange at a higher price; at the other one, where it is cheaper, we buy and remember the price difference for sure! Now, after entering the position, we monitor the price change and write the data down in the sheet for analysis.

Entry point to the transaction Price difference increased Price difference decreased
Selling price (profit) 10 10,4 (-0,4) 9,7 (+0,3)
Purchase price (profit) 9,5 9,8 (+0,3) 9,4 (-0,1)
Delta (profit) 0,5 (0,0) 0,6 (-0,1) 0,3 (+0,2)

What happened?
With an increase in the difference in price between coins, we get a total loss, i.e., the profit at one exchange does not cover the loss at another one.
With a decrease in the price difference, we gain a profit in the general position since the loss is less than the profit.

This may be used to draw up a rule for trading, we monitor the spread (price difference) between coins and as soon as they reach a local maximum, we enter the transaction. After the spread decreases, we close the deal, i.e., we sell the bought coin and buy the sold one back. As a result, our total balance at both exchanges will be more than it was at the beginning of the transaction.

The disadvantage of both methods is the splitting of the account into two halves, which exactly two times reduces the resulting profit. Trading the relative spread is less risky but the number of transactions and profit in each of them are lower. On the other hand, this is probably the only option for the most liquid coins and exchanges since the price difference may be minimal.

For the brave ones

we may offer to trade using margin lending. Currently, many major exchanges are introducing margin trading, which allows the trader to increase the amount of its funds by receiving the missing amount as a short-term loan secured by coins on the account. The most liquid coins are taken as security, most often Bitcoin and ETH. .
The leverage, the multiplier of your account, is 2 to 5, i.e., you may 2 to 5 times increase the volume of your account with respect to the security. Interest for using the loan is from 1% per day to 3% per year. Technically, this means that other users of the exchange lend their coins to you, thus, the loan rate floats depending on supply and demand.

There are two strategies for using marginal leverage, first, instead of trading only with your own funds, you use margin ones at one of the exchanges; in this case, splitting the account into two equal halves is not required, you may use the 7-to-3 ratio with the rest 4 parts completed through the margin. Thus, on the one hand, you reduce the risks of price changes during the transaction, and on the other hand, you manage to maintain 70-80% of profit relative to trading without risk control.

The second way is using short transactions, which is the type of transaction when you sell an asset that you do not have. For example, in our case, we need to sell a coin at one of the exchanges, and buy a coin at another one; it doesn’t matter whether we trade a relative spread or an absolute one, if we are using a “short,” we do not need to sell our coins, we may borrow them from the exchange and when we close the transaction, we will buy them on the market (or replenish the deposit by sending it from another exchange) and redeem the debt.
This method also allows splitting the account in an unequal proportion, which means increasing profits and starting a transaction with any profitable coin because we have money at another exchange where we may buy any asset, and at the exchange where we need to sell coins, this asset may not exist, so not to wait until it arrives here, we may and shall use a short sale.

The most secret way

Clever books describe it and are the Internet is silent about it, using short sales as a hedge.

Hedging is the protection of an asset against price changes; usually, it is selling a future against a purchased share or buying a future against a sold option.
In cases of cryptocurrency arbitrage, a defensive sale is against a purchase..
What is the point of such complex and incomprehensible terms?

There are two exchanges where it is possible to carry out arbitrage transaction profitably, at the same time, there is no way to enable margin trading on them, and now, these exchanges are the majority. Splitting the account in half is not beneficial, there will be little profit.
The only option is to buy a coin and send it in a 20-minute journey, having crossed fingers for luck, hoping that the price will not drop at the last moment.
It is possible that several transactions will be profitable but the next one may become failing, which is the possibility to lose all the profit for the day or even more.

Protection is needed but not to the detriment of profit!

For this, we use the following trick. After buying a coin, we will sell the same amount of coins at any liquid exchange shortly; it does not matter how much this coin costs, it is not the price itself that matters but the delta of its change, which is our hedge, i.e., protection. Then, everything will go as in the text, we send the coin bought to another exchange and sell it there.
If the price drops at the time the transaction is closed, then it is ok since our hedge will give a profit, if we sell it more expensive, we will buy it back cheaper. The profit gained compensates for losses on the coin sold cheaper.
And if the price does not change, then we will the hedge at the same price we have bought it, getting a small loos on fees. If the price grows, we will not gain "excess" profit, it will be eaten up by the hedge loss.

Such complicated schemes are not so easy to understand and trading them under the stress of losing money is even more difficult, so I keep repeating that the Cryptoroute service is specially designed to facilitate the cryptocurrency trading!

Do not neglect the safety rules:

  • After analyzing the market and choosing a coin suitable for profit margins, be sure to go to the exchange website to confirm that this coin may be withdrawn and accepted for deposit. In our Cryptoroute service, we do it automatically once a minute, but it is worth checking.
  • Break the entire transaction volume into several orders. Place them as stairs with a slight offset; this will help to fight for the first place in the order book without removing your order from the market, at that moment, you may be executed, but with removing the order from the depth of the order book and repeatedly placing it to the best position. Such a carousel will help you always be the first order in the book and follow the price; if the price falls, then you will average your position by buying the following parts at a lower cost..
  • Do not be greedy, remember that the investor is a greedy scalper. As soon as the order is executed at one exchange, it closes the second half, so if you do not maintain the ratio, then sooner or later you will catch a sharp change in price against your position. For the last several months, I have had a couple of thousand Ripples on my balance that I did not want to sell at a loss of 1 cent per coin. Since then, dropping the price by 60% has served me as a good lesson that greed is bad!
  • Using margin lending, monitor the price, do not buy for all funds you have, your position may be forcibly closed if the security is not enough to cover losses and even earlier; the exchange will not allow a negative balance of your account. .
  • Do not pursue a super profit, ten little birds in hands are better than one fat bird in the bushes since at the most inopportune moment it may fly away.
  • Trade with your own funds; there is no need to take a loan, to sell a kidney, or to mortgage a house. In any case, trading is a risk. Do not frame yourself and your loved ones!

Stay healthy and financially successful!

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