Let’s explain the methods of arbitrage trading! (Series 2)

Let's go through the actual methods of arbitrage trading in order.

We also introduce points to help you succeed in trades.

Arbitrage Trading Methods Basic

First, a brief explanation of how arbitrage works.
(In actual trading, what you see as “buy” from your side is “sell” for the other side, so keep that in mind.)

Just as with foreign currency exchange where there are “sell” and “buy” prices for dollars and euros, there are “sell price” and “buy price” for cryptocurrencies as well.

Sell at the highest price (sell price) - Buy at the lowest price (buy price) > 0 (spread)

This is the structure, so the steps can be broken down as follows.

① Find the exchange where you can buy the cheapest
② Find the exchange where you can sell the highest
③ Buy Bitcoin on the first exchange
④ Send Bitcoin from the first exchange to the second
⑤ Sell on the second exchange

［Example］

Exchange A: Sell price 1 BTC = 500,000 yen, Buy price 1 BTC = 501,000 yen
Exchange B: Sell price 1 BTC = 504,000 yen, Buy price 1 BTC = 505,000 yen

In the above example, selling on Exchange B and buying on Exchange A yields the largest profit.

Per 1 BTC: Sell price 5,040,000 yen – Buy price 5,010,000 yen = 3,000 yen

Thus, you gain a 3,000 yen arbitrage per 1 BTC.

From this, subtract the fees to get the actual profit.

Arbitrage Trading Methods Advanced

You can perform arbitrage with the basic method, but in reality, withdrawals, deposits, and order confirmations take time, creating a trading time lag.

Deposits/withdrawals take about 1–2 hours, and some buy/sell orders may fail to execute.

In some cases, this time lag can cause price fluctuations that may lead to a critical failure in arbitrage.

Therefore, in practice the following trading approach is common.

Assume the same conditions as the previous example and that you buy and sell Bitcoin under those conditions.

First, suppose you had already bought 1 BTC on Exchange B when there was no price difference between the two exchanges.

That is, 1 BTC = 502,500 yen.

After that, the price difference arises. However, this time you already hold 1 BTC on Exchange B, so there is no transfer hassle.

When the price difference occurs, you execute a simultaneous buy and sell. Sell 1 BTC on Exchange B and buy 1 BTC on Exchange A.

At this point, the profit from the transaction on Exchange B is 1,500 yen.

Next, when time passes and the price difference narrows (1 BTC = 502,500 yen), you sell the 1 BTC you hold on Exchange A.

Again, you gain 1,500 yen of profit.

As a result, you obtain a total arbitrage of 3,000 yen.

［Example］ Held coin (at purchase) Simultaneous buy/sell Held coin (at sale) Difference
Exchange A: 0 BTC (=0 yen) Buy price 1 BTC = 5,010,000 yen 1 BTC (=5,025,000 yen) +1,500 yen
Exchange B: 1 BTC (=5,025,000 yen) Sell price 1 BTC = 5,040,000 yen 0 BTC (=0 yen) +1,500 yen

With this principle in mind, in practice you

“simultaneously buy when the price gap widens, and then sell oppositely when the gap narrows”

repeat such trades to accumulate profits.

Using this method, you can earn spreads through short-term trading while holding cryptocurrency for the long term.

Key Points for Arbitrage Success

To efficiently arbitrage, the key is to capture the moment when the price gap between exchanges widens to the maximum and complete trades quickly.

① Build information-gathering capability

If you had no tools at all, you would have to compare prices across many exchanges, timing your buys and sells when you notice a gap opening.

You would constantly check prices day and night, paying fees for trades due to small errors of several thousand or a few hundred yen...

On the other hand, if there were systems that automatically monitor price gaps and alert you when the gap exceeds a preset threshold, how would that feel?

It would be highly efficient.

Tools include matrices that display real-time price gaps between exchanges and software that automates arbitrage.

② Do not neglect pre-arrangements

The more exchanges you can use, the more opportunities you have to trade.

Register as many exchanges as possible.

Different exchanges have different ease of registration, identity verification procedures, and fees.

Fees directly affect the profitability of each trade, so be sure to understand exactly how much fee is charged at each step.

After registering, deposit funds to purchase cryptocurrency into each exchange.

③ Use overseas exchanges

As you gain experience, using overseas exchanges is recommended. The number of available exchanges equals the number of trading opportunities.

Overseas exchanges handle dozens of cryptocurrencies, greatly expanding arbitrage opportunities.

(To be continued)

Details of the Arbitrage System products are here