Why Crypto Arbitrage is NOT a Sure-Fire Strategy


24 November 202010 min read

As of writing this article, there are almost 1,000 different cryptocurrency exchanges operating in the market. This number of cryptocurrency buyers and sellers is seen as a great opportunity for some who want to take advantage of crypto arbitrage trading. But what is arbitrage trading and what are some of the things you should consider when thinking about executing this strategy?

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Crypto arbitrage trading in short

Arbitrage is when a trader purchases an asset in one place and sells it in another to profit from a deviation in price between markets. e.g. 1 $BTC costs $16,000 on Binance but it's currently also trading at $16,020 on Kraken. So you purchase your Bitcoin on Binance and hopefully you will be able to sell it quickly enough on Kraken to make that $20 profit.

Many traders are excited about the prospect of making a few bucks from the discrepancies between exchanges but before you run off to quit your job and starting cashing in, you should absolutely read this article and understand why you should think carefully about whether it is for you.

As with all money-making vehicles out there, using crypto arbitrage is not without its risks and there are many things to learn in order to effectively employ this strategy and consistently make a good return so today we’re going to talk about some of the more common pitfalls that people experience when trading with crypto arbitrage.

Cryptocurrency trading is not a guaranteed method of making money.

All methods of cryptocurrency trading come with their own risks.

1. Projects with the same name

There are thousands of cryptocurrency tokens out there that you can buy and many of them have similar—or in some cases identical—ticker symbols. A good example of this is the project ‘SIA’ which is an application for decentralized cloud storage solution and its symbol is very close to another project called ‘SAI’ and you’re going to end up losing all your coins if you confuse the two. This might seem like basic stuff if you’re a trader but this becomes significantly more worrying and dangerous when you realize there is a number of projects with identical ticker symbols such as with Binance and the project ‘CyberMiles’ which has the ticker $CMT, some other cryptocurrency exchanges also have $CMT but it usually stands for ‘Comet,’ a completely different project. There are many more examples of this such as $HNC (HellenicCoin) and $HNC (Huncoin) or ($BTCS) Bitcoin Scrypt and ($BTCS) Bitcoin Silver. This list could go on for a while so you begin to understand that this is a prevalent problem - especially among newer traders. Worse still is that exchanges will not offer you a refund if you make the mistake of sending funds to the wrong wallet address.

To avoid making this mistake, just have a good think about the price and volume of both options. If the price is suspiciously low on one exchange and you have your doubts then it’s probably the wrong symbol. A final check to make sure you are doing arbitrage with the correct symbols is by simply looking at the logos of each project - if they have different logos then it’s not the same project.

2. Exchange wallets offline or on a different blockchain

Sometimes, exchanges will choose to disable their cryptocurrency wallets either for the whole platform or individually. This could be for a variety of reasons ranging from a security concern to general wallet maintenance. It could happen just when you want to execute a juicy trade and put a stick in your wheel.

Most cryptocurrency exchanges will have a fixed page where you can find if the wallet you need is online or not and they might also tell you when it should be back online so it is always worth checking this page before making any trades.

The second thing you should do is double check that the exchanges provide the tokens on the same blockchain. The reason for this is that sometimes cryptocurrencies will move from one blockchain to another such as when EOS ($EOS) moved from the Ethereum blockchain to its own mainnet and therefore has two different wallet address formats.

Again, these are just some of the factors you must consider when thinking about using crypto arbitrage.

3. High deposit and withdrawal fees

It’s no secret to traders of any level that exchanges love their withdrawal fees, for example when you want to remove your Bitcoin from HitBit, you will be charged 0.00085 BTC for the transaction which is a significant chunk of your cryptocurrency.

That’s why you’re going to want to read up on deposit and withdrawal fees on both of the exchanges you trade with. If you don’t do this then you may lose all your potential profit (and more) in fees alone rendering the whole thing pointless.

In order to negate this problem you can simply calculate the total expenses before executing an arbitrage trade. Open a spreadsheet or just jot the numbers down on a piece of paper. Here’s a useful tool to help you get started, it lists out all the fees for most major exchanges.

4. Lack of volume

Before starting arbitrage, it is important to check that there is enough volume for you to effectively execute the trade on the respective exchange. As of today, hundreds of cryptocurrencies have been delisted due to the fact that the trading volume is so low. That means if you buy X coin on Binance with the intention of selling it for profit on Kraken but no one is buying then you might end up with a load of coins that you can’t sell and lose a lot of your money.

With arbitrage, you can have a string of great trades but you just need one to go wrong and put you back at square one or even worse off than when you started! Furthermore, the coin can have volume and you still can’t sell it at a price that suits you! The ask price, bid price and depth are way more important than the last price.

You can avoid running into that issue by keeping an eye on the exchange order book and making sure that you see transactions moving or if it’s still. Make sure that these are significant transactions and not just small amounts of ‘dust’ being moved around to trick you into thinking that the exchange is busy.

Also check out the coin’s volume on a daily perspective and look at the volume from a transactional perspective. If you can’t find volume in either of these then simply don’t consider the transaction.

5. Pump and dump schemes

The cryptocurrency market would not be the same without what is known as ‘Pump and Dump’ schemes. This is a way of scamming traders by artificially inflating the price of an asset by feeding false information, fake positive news and price action with the end goal of selling a large number of those coins for a big profit.

There are a handful of groups that exist only to carry out Pump and Dump schemes and every time they are successful, the people who bought the crypto last are left to ‘hold the bag’ virtually unable to sell after that.

One way to check if you’re buying into a P&D scheme is by employing a little technical analysis. We’re not going to teach you about technical analysis right now as the subject would require its own article but in brief, you can get clues by looking at the volume and 1-minute charts amongst other T/A indicators.

6. Your deposit is stuck requiring manual approval or your account is simply blocked

This one happens all the time in the crypto trading world and anyone who knows crypto twitter is familiar with frustrated exchange users who have deposited funds to make a sweet trade but missing the opportunity because the exchange needs to approve the deposit. It can often take days of back and forth between user and exchange to figure out what has happened and usually you have to provide some kind of proof-of-funds document to unlock your funds. Whatever the case, you lose lots of valuable trading time which is inconvenient in a market that moves so quickly.

Generally, there is little you can do against this but some people have reported having less issues when they deposit smaller fractions of their funds instead of one lump sum so that is something to consider but you will also end up paying more deposit fees so the choice is yours.

Some cryptocurrency exchanges are ‘unregulated’ and, while that may be a good thing it can also have its downsides. Theoretically, these platforms can take your assets and disappear with no good reason or with vague requests for more information in order to access your funds. There are also horror stories where exchanges just close shop, holding the users’ money and disappearing. Whilst these cases are definitely not the norm - they are definitely not unheard of either. This affects arbitrage traders more than anyone else because they are much more likely to trade across a large number of platforms with some of them being not-so-trustworthy as others.

Now is a good time to remind all crypto traders that they should keep their funds on a cold wallet. This is a habit that everyone should get used to and is a rule of thumb among the hardened crypto veterans. Having full control over your funds means that no naughty hackers will be getting their hands on them.

7. Trading fees

Exchanges have a habit of constantly adjusting their trading fees so you could be enjoying low fees on your favorite pair one day and the next you’re forking out a lot more. For example, in 2019, Coinbase Pro hiked their fees by 200% for traders who they deemed to have ‘low volume.’ Maker and taker fees both increased significantly in the general overhaul too leading to frustration. The only way to avoid being caught out by this is to just check the fee structure every day.

8. Timing

Despite the fact that there are many opportunities to snatch a good trade and make some money with this strategy, timing is really what is needed here and you must be able to execute your trade quickly if you want to reap the rewards. The cryptocurrency market is prone to change wildly from one second to the next which is not ideal for arbitrage at all which leads us comfortably into our conclusion.

There are a lot of factors in crypto arbitrage that need to work together in order to be successful.

Effectively investing in cryptocurrencies often requires a lot of time and patience.

Crypto arbitrage is not ideal

We’ve discussed some of the pitfalls that traders will encounter when engaging in arbitrage in the crypto world and as you can see, they’re quite significant. And after reading through this you might be asking yourself if it’s worth getting involved at all. While yes it is true that some traders have been successful in executing arbitrage trades...for the most part exchanges will get in the way at one point or another. There are simply too many moving parts in the cryptocurrency trading space that need to work harmoniously and constantly together to allow you to make your trades and is that a risk you want to take? Unregulated exchanges can hold or simply take your money quite easily and using regulated platforms often leads to slow-moving deposits and transactions so that can put a stick in your wheel too.

On top of all that, you yourself need to be able to consistently see prices on a wide range of platforms and be able to act quickly. As a human, you are physically unable to process all that information 24/7 and unfortunately you will miss a lot of opportunities thanks to sleeping, eating or any other of your daily activities.

What are the alternatives?

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