In this article, we are going to look at low-risk crypto arbitrage trading, which is a strategy for investors looking to capitalize on, during periods of high volatility. But what is it exactly? We’ll guide you through the concept of low-risk crypto arbitrage trading, its strategies, and potential risks.
Low-risk crypto arbitrage involves exploiting price differences to buy crypto cheap in one place and sell it for a higher price in another place. It is considered relatively low risk because trades happen quickly, can be automated, don’t require predicting market direction, and minimize exposure.
What Is Low-Risk Crypto Arbitrage?
Low-risk crypto arbitrage trading is a strategy to make a quick buck and is used to profit from price differences in cryptocurrency trading pairs. In simple terms, it involves buying a cryptocurrency at a lower price in one market and then sending it to another market, where its price is higher, and thus making a profit from the difference.
For instance, if Bitcoin is trading at $50,000 on one exchange and $51,000 on another, an arbitrage trader would purchase Bitcoin at the lower price and then sell it at the higher price, earning a $1,000 profit.
An attractive feature of this strategy is that it is considered to be reasonably low-risk and can offer consistent returns. But as with everything, if it’s so easy, why doesn’t everybody do it?
What is the Process of Low-Risk Crypto Arbitrage Trading?
To arbitrage crypto trades we have to look at the process that is necessary to do it correctly and swiftly. Here’s how the process typically unfolds:
Price discrepancies of a short term
Crypto exchanges can have slightly different prices for specific digital assets. Because the arbitrageurs are constantly on the lure, these differences will not last long. We’re talking about minutes.
Identifying opportunities
As an arbitrage trader you have to monitor the prices of cryptocurrencies constantly and look for these discrepancies. Most of the time this will be done by scanners.
Executing the trade
Once an opportunity is identified by you and your scanner tools, the trader hastes himself to the exchange where the cryptocurrency is bought and sent to the exchange that has the higher price. Most of the time this will be done by a script, meaning automated code.
Monitoring and repeating
Arbitrage traders constantly monitor the market for new opportunities and repeat the same process we described, although most of the arbitrageurs will be set up bots, this is especially the case in DeFi.
Types of Crypto Low-Risk Crypto Arbitrage
In crypto there are many markets where to buy and sell digital assets, this has the result that crypto arbitrage is a very broad term and can be applied in many different ways. We discuss some of the types of crypto arbitrage, each with their unique characteristics and risks;
Exchange Arbitrage
The most common type of crypto arbitrage, involves buying from one exchange where it is priced lower and selling it on another exchange where the price is higher. This type of arbitrage is possible because different exchanges having different prices for the same cryptocurrency. This is due to differences in supply and demand, trading volumes, and or market manipulation by big actors. But also those exchanges that operate in different regions are targeted, crypto is truly borderless.
Intra-Exchange Arbitrage
Different trading products of a cryptocurrency exchange can be arbitraged. For example, some low-risk crypto arbitrage in peer-to-peer transactions where you buy from low ask prices and sell them later at a higher bid on somebody else via the P2P platforms.
Triangular Arbitrage
This is a more complex type of low-risk crypto arbitrage that involves taking advantage of price differences between three cryptocurrencies on different exchanges. Here the strategy is buying one cryptocurrency, exchanging it for another, and then exchanging that second cryptocurrency directly for a third cryptocurrency, which is then sold for a profit.
Decentralized Arbitrage
This type of low-risk crypto arbitrage is happening on decentralized exchanges (DEXs) or automated market makers (AMMs), where you discover different prices of crypto trading pairs with the help of automated smart contracts. Sometimes called the ‘dark forest’. A place where it is bot against bot, here you have to know what you are doing, because other bots will eat you up.
Why Is Crypto Arbitrage Considered Low Risk?
Well, now that we’ve seen all the different types and strategies, the question arises, is this really low risk? Well in theory it is considered lower risk than actively trading cryptocurrencies. This is because it involves less analysis and requires just identifying the price differences. Also, the short duration of being in the trade causes a lower risk, as it takes only minutes to complete trades and minimizes your exposure.
It can be automated, so if your bots help you with your low-risk crypto arbitrage strategy, you ‘only’ have to monitor them. At last, there is no market direction prediction underlying. Your profit-making is not attached to the bullishness or bearishness of the market. It can be useful in all markets, although these opportunities of short duration are often too long in really volatile times.
What Are the Risks Associated With Low-Risk Crypto Arbitrage Trading
So, talking about low risk is different from talking about no risks at all. Indeed nothing in this world comes without risks, let’s take a look at the risks of low-risk crypto arbitrage.
Transaction delays
Buying crypto can take several minutes and sending them to other exchanges could take longer, especially if the blockchain is congested. From minutes to hours, meaning the opportunity is gone when your coins arrive at their destination.
High Fees
Besides longer confirmation times, the high trading fees or gas will limit your joy of becoming rich when sending your crypto to other exchanges.
Extreme Market Volatility
With the highs and lows of crypto, it makes it challenging to execute trades quickly and accurately at the price you want to buy or sell at.
Limited Small Opportunities
Price differences between crypto exchanges or any other platforms are often so small that a large amount of capital is needed to capitalize on them. This makes the small players unable to arbitrage and profit well.
Reliability of Data
Crypto arbitrage trading usually happens with scanners or bots, but these have to act on data. Exchanges or projects know this and sometimes willingly disturb data outflows. This makes this strategy prone to errors that could mean missing out on profitable opportunities or facing losses.
Learn how to avoid falling victim to deceptive token presales by understanding the inherent risks in “Token Presale: The Mechanism, Benefits, and Risks”.
What Are Crypto Arbitrage Scanners?
By having a quick look online, we find several websites that provide crypto arbitrage scanners. We examine the five most popular;
ArbitrageScanner
This is an arbitrage scanner that covers both centralized and decentralized exchanges and offers an extensive list of features and capabilities.
Coinrule
A more beginner-friendly platform designed to streamline crypto arbitrage.
Cryptohopper
Backed by the power of AI, the trading bot will arbitrage for anyone who wishes and pays of course.
Bitsgap
A platform that offers bot trading templates for leveraging arbitrage opportunities across many different crypto exchanges.
3Commas
The most known platform that has the outlook of different marketplaces suited for automated crypto trading strategies, it works with API keys and lets traders trade on all platforms directly.
We should mention that although these tools can help identify arbitrage opportunities, and also execute them, traders should always carefully consider the associated risks and cost of using these platforms.
See how platforms like DefiLlama and Dune Analytics help traders gain market insights in this list of the “Top 10 Crypto Analysis Tools To Watch Out For In 2023”.
Final Words
Low-risk crypto arbitrage has gained popularity as a trading technique in the cryptocurrency industry. Ranging from simple arbitrage opportunities to ‘4D chess’ where players have to consider many other risks and potential costs in their analysis.
Low-risk crypto arbitrage trading can be a profitable strategy made by many big venture capitalists or smart investors that have a lot of money and resources. The method to act quickly and swiftly before others do is more than crucial if you want to embark on your crypto arbitrage trading journey.
