Comprehensive Review on Arbitrage Investing on Decentralized Exchanges, Is it Really Profitable?
Crypto arbitrage involves buying and selling assets from several markets or exchanges concurrently to profit from the price difference, otherwise known as the spread. Running arbitrage transactions typically implies you’d buy assets cheaper from one exchange and sell it at a higher price on another exchange.
Similarly, arbitrage crypto investment or crypto arbitrage entails buying a crypto asset cheaper on one exchange and selling them on another exchange where the price is higher. A person who carries out arbitrage is called an arbitrageur. Again, it’s worth knowing that crypto arbitrage is vast, and leveraging the price discrepancies on exchanges to make a profit is just one aspect of crypto arbitrage.
How is Arbitrage Crypto Investment Done?
Different market factors play together to influence crypto price differences among exchanges. For instance, some of the popular crypto exchanges determine asset prices based on demand and supply. Let’s say the demand for ADA on Binance drops; its price also follows suit. Conversely, when there’s high demand for ADA on Binance, its price increases.
Interestingly, many smaller exchanges follow crypto asset prices set by bigger exchanges, making them crypto arbitrage-friendly. That means it’s possible to buy crypto from a smaller exchange where it’s cheaper and sell on larger exchanges to earn profits.
While people may expect cryptocurrency arbitrage to be more complex in application than traditional arbitrage, they are similar in principle, involving leveraging price differences between crypto coins on different exchanges. For instance, if Kraken sells Ethereum for 4,000 while Binance sells for 4,200. It means that an arbitrageur buying from Kraken can earn up to $200 by selling on Binance.
With hundreds of centralized exchange spot markets selling crypto at slightly different prices, crypto arbitrage continues to thrive in centralized exchanges, and arbitrageurs have a truckload of opportunities. As such, they devise smarter ways to leverage these opportunities and profit from the slight, often sharp, price differences across exchanges. That leads us to arbitrage crypto investment on decentralized exchanges. How does it work? Let’s find out.
Arbitrage Investing on Decentralized Exchanges (DEXs)
Crypto arbitrage on decentralized exchanges (DEXs) follows the same principle as centralized exchanges (CEXs). However, they differ slightly in operation. As a DEX arbitrage trader, you can buy or sell crypto in liquidity pools, leveraging their cheapness or dearness on different exchanges. The increased actions of arbitrageurs across DExs finally result in balance and cross-exchange price consistency.
DEX arbitrage trading leverages AMMs (Automated Market Makers). These AMMs track trading pair prices using automated and decentralized programs called smart contracts. On discovering significant price differences between DEX trading pairs and CEX spot prices, traders immediately implement cross-exchange trades (between decentralized and centralized exchanges).
Again, DEXs like UniSwap feature independent trading pools between cryptocurrency pairs, which amplifies arbitrage opportunities. Traders can perform cyclic arbitrages where they can swap across multiple assets to make a profit. For instance, a trader can exchange ETH for UNI, then UNI to DOGE, and then DOGE to ETH.
DEX arbitrageurs can also profit by exploring yields offered across DeFi lending protocols. For example, if a platform yields 9% from a stable coin, while another yields 12%, then a trader can swap their low-yield stablecoin for a high-yield one to earn an extra 3%. Services like Yearn.finance shuffle crypto assets between DeFi protocols to earn better yields.
Another profit system for DeFi traders is front-running other trades. By quickly taking advantage of profitable trading positions, you can make some good profit. Bots make it much easier. Your bot can pay a little more in fees for your trade to jump the queue, thus increasing your odds of earning more money.
Risks of Arbitrage Crypto Investment?
Slippage happens when a crypto trader submits their order to buy crypto, but their order is bigger than the cheapest offer in the order book. The result is that the order ‘slips’ and the trader pays more than they should have paid. Slippage poses a big threat to traders, mostly because of the small trading margins. In effect, slippages could swallow up potential gains.
#2. Sharp Price Actions
The per-second price movement is another risk associated with crypto arbitrage. Arbitrageurs must be fast enough to leverage those sharp price changes and earn significantly. But how much can traders’ speed match those quick price movements? That explains why some traders use bots and cross-exchange tracking software for arbitrage trading.
#3. Transfer Fees Between Exchanges
Transfer fees between exchanges may be a limiting factor for crypto arbitrage traders. Seeing that spreads (difference between the buy and sell prices) of bigger cryptocurrencies are usually small on average, transfer fees could swallow traders’ potential gains. Again, the smaller margins imply traders must make sizable amounts of trade to make good gains.
Software, Bots, and Tools
Here are several software tools that facilitate crypto arbitrage;
Bitsgap is a cross-exchange platform that enables you to connect various crypto exchanges like Binance, Kraken, etc., into one interface. With its integration with 25 exchanges, you can deposit funds in supported exchange, track arbitrage openings, and run automated transactions.
MultiTrader is one of the best crypto arbitrage platforms. It features about 21 crypto exchanges and automates trades using arbitrage trading bots.
HaasBot is an automated trading platform created by HaasOnline to help you trade different crypto assets. It provides you with trading tools like indicators, customizable bots, and several other advanced features for newbies and trading professionals alike.
Cryptohopper is another efficient and reliable arbitrage trading bot. Aside from cross-exchange trading, it offers advanced triangular arbitrage—which lets you earn on price differences between several on-exchange pairs. It also flaunts a user-friendly interface integrated with most exchanges.
Arbitrage trading is one of the ways to profit from the rich and Fast-Evolving crypto economy. You can use bots and automated software tools to maximize your crypto arbitrage efforts and earn more significant rewards.