Arbitrage trading in cryptocurrency for beginners! (Series 3)

What is arbitrage trading in cryptocurrencies?

Both cryptocurrencies and stocks are investment targets for speculative purposes, but their mechanisms differ between the two.

Also, in stocks, the price is the same at any securities company, but in cryptocurrencies, prices differ across exchanges.

Therefore, we will explain the basics of cryptocurrency arbitrage trading.

“What is arbitrage (arbitrage trading)?”

Arbitrage is a trading approach that seeks to profit by buying the cheaper side and selling the pricier side when a temporary price discrepancy (distortion) arises for products with the same value.

Afterward, when the price gap between the two narrows,

perform the opposite trades for each side to capture profit.

（Referenced from SMBC Nikko Securities site）

Arbitrage trading is mainly used by institutional investors aiming to “squeeze” the spread (profit from price or rate differences) with large funds.

If the amount is large, a single trade can influence the market.

This is said to contribute to proper price formation in the stock market.

In short, it raises the rate of return by the spread, but in cryptocurrency, a characteristic is that currency prices differ across exchanges.

Also, each exchange has its own spread fees at its trading desks, and fees differ, causing

the currency prices to vary.

By exploiting these price differences to buy and sell currencies, you perform arbitrage in the context of stocks.

Also, cryptocurrency exchanges allow transfers of currencies between exchanges.

This is a feature not present in stock securities.

“Arbitrage aiming at price differences on cryptocurrency exchanges”

As mentioned above, a unique feature in cryptocurrency is that you can purchase the same cryptocurrency from multiple exchanges,

and you can transfer between exchanges.

In the crypto world, the basic trading form is spot trading.

Overseas exchanges are basically spot trading, but in Japan there are not only exchanges but also OTC desks (sales desks).

A desk is where you purchase directly from a vendor instead of trading with users.

Therefore, you can buy cryptocurrency on Exchange A and if it seems to fetch a higher price on Exchange B, you can move the crypto there and sell it. However, you may wonder whether there is a reason to incur transfer fees to move to Exchange B just to sell.

When considering purchasing cryptocurrency, you compare prices across several exchanges and want to buy from the cheapest one. Since crypto can be transferred between exchanges, when selling, you compare prices across several exchanges and suppose Exchange C offers a higher price than Exchange A.

In that case, it’s easier to realize greater profit selling on Exchange C rather than Exchange A, based on the purchase price.

Because there is the effort of transferring to other exchanges, this is a low-risk opportunity to earn profit with a relatively large amount.

“About checking Bitcoin market prices”

Real-time market checks can be done on the siteEveryone’s Cryptocurrency.

“Examples of arbitrage in cryptocurrencies”

Using the above market prices to perform arbitrage.

Buy 1 BTC on bitFlyer: 895,643 yen

Sell 1 BTC on Zaif: 897,500 yen

The difference is 1,857 yen.

In other words, by transferring to an exchange with a higher price and selling there, you can earn a profit of 1,857 yen with low risk without waiting for prices to rise.

The larger the purchase amount, the larger the spread profit.

Also, you can sell immediately without waiting, and there is no need to spend time analyzing charts, but

there are also disadvantages.

You don’t need to watch charts much, but you must constantly monitor multiple exchanges.

Prices may change while you are transferring to other exchanges.

Such cases can put arbitrage at a disadvantage.

“Registering with several exchanges”

To engage in arbitrage trading, you need to register with several exchanges.

At least two, but with only those two, it is difficult to efficiently generate spreads.

The number of exchanges you register is equal to the number of opportunities to create spreads.

In the beginning, it is recommended to register with domestic Japan exchanges or overseas exchanges that support Japanese.

Registration is free anywhere, so if you are doing arbitrage, it is best to register with as many exchanges as possible.

Domestically,

・BitFlyer (specialized in the sales desk)

・GMO Coin (specialized in the sales desk)

・Zaif (exchange)

・Bitbank (exchange)

・QUOINEX (exchange)

After registering with Japanese exchanges, first deposit Japanese yen to prepare.

Deposits may take some time to reflect, so it is safer to deposit in advance.

Overseas (basically all exchanges)

・Binance (popular with Japanese users)

・Kraken (Japanese language support)

・Bitfinex

“Summary of arbitrage in cryptocurrencies”

Arbitrage trading does not require chart checks, but you need to register several exchanges and monitor their prices. Also, to generate substantial profits from price differences across exchanges, you need a certain amount of investment, but it is low risk, making it accessible to beginners.

To profit efficiently, it is recommended to use tools that allow you to check price differences across exchanges all at once.

(To be continued)

Details of the Arbitrage System products are here