Effective cryptocurrency arbitrage: principles, types, and opportunities for starting
Even when the price of digital assets is in a consolidation phase — meaning it fluctuates within a narrow range without significant growth or decline — opportunities to earn may still arise. One of the most effective ways to generate profit in such conditions is cryptocurrency arbitrage.
What is cryptocurrency arbitrage?
Cryptocurrency arbitrage is a trading strategy in which a trader earns profit from price differences for the same crypto asset.
Cryptocurrencies are highly volatile assets whose prices can change by dozens of percent in just half an hour. Typically, on different trading platforms — both centralized and decentralized — cryptocurrency prices tend to align, but this does not happen automatically.
For example, when traders or investors sell a large amount of digital assets on one exchange, their price can sharply change and temporarily differ from the price on other platforms. This phenomenon is called an "arbitrage window" — a situation where the same digital asset has different prices across exchanges.
This is the exact moment when profitable cryptocurrency arbitrage opportunities arise. Arbitrage traders enter the game: they buy the crypto asset on one platform at a lower price and sell it on another platform at a higher price, earning profit from the price difference.
Thus, arbitrage traders also benefit the market in some way by making trading more stable and helping restore the price after sudden drops, such as the loss of a stablecoin's peg to the US dollar.
What types of cryptocurrency arbitrage exist?
There are two main types of cryptocurrency arbitrage: inter-exchange and intra-exchange. The arbitrage described in the previous section is inter-exchange arbitrage.
Here is an example of inter-exchange cryptocurrency arbitrage:
- A major player (a whale) sells bitcoin on one exchange, and its price drops sharply by 2% — from $100,000 to $98,000. However, on other platforms, the price hasn't adjusted yet.
- A trader discovers an arbitrage opportunity and buys 0.1 BTC for $98,000;
- The arbitrageur then transfers the bitcoin to another exchange and sells it at $100,000. After selling 0.1 BTC, the trader's profit will be $200, excluding all transaction fees.
However, the price of the same asset may differ not only across exchanges but also across trading pairs on the same platform. In this case, traders can profit from price differences across a single trading platform — intra-exchange cryptocurrency arbitrage.
For example, the price of bitcoin on an exchange in the BTC/USDT pair is $100,000, while in the BTC/ETH pair it is $95,000 due to increased market volatility. Then arbitrage looks like this:
- The arbitrageur buys Ethereum worth $10,000 at the market price.
- Then, they purchase bitcoin using this amount in the BTC/ETH pair at $95,000;
- Finally, the trader sells the bitcoin at $100,000 in the BTC/USDT pair and earns a profit of $500, excluding exchange fees.
These are simple examples, but more complex schemes also exist, sometimes combining different types of cryptocurrency arbitrage. Profit from cryptocurrency arbitrage can be obtained not only from trading the asset itself but also from using derivative financial instruments such as futures.*
* A futures contract is a type of trading agreement that allows one to buy or sell a specified amount of cryptocurrency at a predetermined price in the future.
In addition, futures allow traders to increase profits from cryptocurrency arbitrage through leverage — the use of borrowed funds.
However, it's essential to consider that using futures, especially with leverage, carries higher risks and may result in the complete loss of the deposit due to liquidation — a situation in which collateral no longer covers the borrowed amount when the asset's price changes.
There are also other types of cryptocurrency arbitrage, such as:
- International arbitrage (using platforms from different countries);
- P2P arbitrage — exchanging directly with other users through the same or different platforms.
Advantages and risks of cryptocurrency arbitrage
Unlike other trading strategies, such as scalping or day trading, cryptocurrency arbitrage does not require extensive experience or the ability to predict price movements based on complex analysis.
Instead, basic trading skills and the ability to concentrate and react quickly are enough. Therefore, even beginners can make money from cryptocurrency arbitrage after a short period of practice and learning.
In addition, cryptocurrency arbitrage does not require large investments, but to earn a significant profit, you need either a large number of trades or a large volume. At the same time, crypto arbitrage carries significantly lower risk of loss than other trading methods and even long-term investments. A trader can also easily combine arbitrage with various ways to earn in crypto.
However, every trading strategy has risks, and cryptocurrency arbitrage is no exception. Depending on the type of arbitrage, some risks may differ.
The main risks are the high volatility of cryptocurrencies and the trading fees charged by exchanges for each trade. For example, while the trader is exchanging assets, the price may equalize across platforms or trading pairs. In this case, the arbitrageur may not only fail to make a profit but also incur losses.
Arbitrage traders must compete with trading bots that can execute transactions via exchange APIs much faster than manual trading. These bots can independently identify favorable arbitrage conditions and make decisions much faster than humans. Using bots can reduce arbitrage risks but requires trading experience.
In intra-exchange arbitrage, the situation is complicated by the fact that many major exchanges use internal algorithms to eliminate price imbalances across pairs. In this case, the "arbitrage window" may close even before the trader reacts.
The risk of inter-exchange arbitrage lies in additional withdrawal fees and possible delays during periods of high user activity. Furthermore, an exchange can freeze deposits or withdrawals at any time, creating further challenges for arbitrageurs.
To avoid such issues, traders may use decentralized exchanges (DEXes) for cryptocurrency arbitrage. However, risks may arise due to blockchain network congestion and delays in transaction processing.
Additionally, due to fees, the trader's profit per trade is often small, and arbitrage opportunities with significant price differences are rare and typically occur during periods of high volatility. Thus, the trader's profit largely depends on the frequency of trades.
Best periods for cryptocurrency arbitrage
The most favorable moments for cryptocurrency arbitrage include:
- Sharp growth or decline of cryptocurrencies due to news or mass purchases/sales;
- Listing of new assets on exchanges;
- Various factors cause periods of increased volatility.
- Surges of activity in specific market segments or with certain cryptocurrencies;
- The emergence of new trading platforms.