Top 3 Crypto Arbitrage Strategies for Traders 1

Top 3 Crypto Arbitrage Strategies for Traders

Trading
• Digitex
April 28, 2021

Sometimes, the same asset is priced differently on two separate markets.

This is when arbitrage comes into play, in which traders spot such market inefficiencies and take advantage of them to make a profit on the price differences.

For example, when BTC trades at $50,000 on exchange A and at $50,200 on exchange B, arbitrageurs could purchase the digital asset on the prior platform and move it to the latter service to sell for a profit (in this case, it would result in a $200 profit for one BTC).

Unlike the traditional financial industry where such inefficiencies are hard to find nowadays, the cryptocurrency space often presents excellent arbitrage opportunities.

For that reason, we have collected the best three crypto arbitrage strategies in this article.

Let’s see them!

1. Simple Arbitrage

As its name suggests, simple arbitrage is among the easiest crypto arbitrage strategies out there and is essentially what we described in our previous example.

When you spot an opportunity, you deposit funds to the cryptocurrency exchange with the lower price, purchase the digital asset, and withdraw it to the other platform to sell it for a higher price.

Since you don’t have to perform any other trades than the ones above, this crypto arbitrage strategy can be executed quickly.

However, due to its simplicity, there is a higher chance of other arbitragers spotting and taking advantage of the same opportunity.

2. Triangular Arbitrage

Taking place either across multiple exchanges or on the same platform, triangular arbitrage aims to profit from the inefficiencies across three cryptocurrencies.

For example, an arbitrage opportunity occurs when the BTC/USDC pair is trading at 50,000 USDC, and one ETH equals 2,000 USDC, but the BTC/ETH pair is priced inefficiently at 30 ETH instead of 25 ETH.

In such a scenario, you execute the triangular arbitrage strategy with the following steps:

  1. You deposit funds to the exchange and purchase 1 BTC for 50,000 USDC.
  2. As the second step, you trade the BTC/ETH pair to convert your Bitcoin to 30 ETH.
  3. Finally, you sell the 30 ETH for 60,000 USDC.

As you can see, this opportunity would have generated you 10,000 USDC in profits with a 20% ROI on three trades. This type of opportunity is very infrequent and must be jumped upon immediately before the exchange’s algorithm quickly corrects the error.

3. Yield Arbitrage

Yield arbitrage allows traders to profit on interest rate inefficiencies between two DeFi lending or staking platforms.

Since the decentralized finance industry is quite new – yet growing at a rapid pace – it’s not unusual to spot irregularities related to interest rates or yields.

With yield arbitrage, a trader borrows funds in a stablecoin with a lower annual percentage yield (APY) for borrowing, exchange it to another stablecoin with a higher supply APY, and uses the latter cryptocurrency to lend funds to others.

An example yield arbitrage strategy goes as follows:

  1. On a DeFi lending platform, DAI’s borrowing APY is 5%, while USDC’s supply APY is 10% (both are USD-pegged stablecoins).
  2. You deposit USDC to the platform and use it as collateral to borrow DAI.
  3. After that, you exchange your DAI back to USDC.
  4. As the final step, you lend the USDC to others to make a profit on a 5% spread between the two coin’s APYs.

While this crypto arbitrage strategy can work excellently on a single or across multiple DeFi lending protocols, it is crucial to take gas fees into account, which have been notoriously high on Ethereum lately.

Closing Thoughts

When the right opportunities are identified and executed quickly, arbitrage strategies can provide lucrative profits to traders.

However, it’s important to note that the simplest opportunities are the easiest to discover. For that reason, you need to act fast before they disappear.

Furthermore, while some crypto arbitrage opportunities may seem highly profitable at first glance, other factors (e.g., excessively high trading costs or when an exchange charges a high fee for withdrawals) may decrease your earnings or even lead to losses.

For that reason, you need to take everything into account and research every opportunity extensively before executing your crypto arbitrage strategies.

April 28, 2021
Trading

Top 3 Crypto Arbitrage Strategies for Traders

Digitex
Top 3 Crypto Arbitrage Strategies for Traders 2

Sometimes, the same asset is priced differently on two separate markets.

This is when arbitrage comes into play, in which traders spot such market inefficiencies and take advantage of them to make a profit on the price differences.

For example, when BTC trades at $50,000 on exchange A and at $50,200 on exchange B, arbitrageurs could purchase the digital asset on the prior platform and move it to the latter service to sell for a profit (in this case, it would result in a $200 profit for one BTC).

Unlike the traditional financial industry where such inefficiencies are hard to find nowadays, the cryptocurrency space often presents excellent arbitrage opportunities.

For that reason, we have collected the best three crypto arbitrage strategies in this article.

Let’s see them!

1. Simple Arbitrage

As its name suggests, simple arbitrage is among the easiest crypto arbitrage strategies out there and is essentially what we described in our previous example.

When you spot an opportunity, you deposit funds to the cryptocurrency exchange with the lower price, purchase the digital asset, and withdraw it to the other platform to sell it for a higher price.

Since you don’t have to perform any other trades than the ones above, this crypto arbitrage strategy can be executed quickly.

However, due to its simplicity, there is a higher chance of other arbitragers spotting and taking advantage of the same opportunity.

2. Triangular Arbitrage

Taking place either across multiple exchanges or on the same platform, triangular arbitrage aims to profit from the inefficiencies across three cryptocurrencies.

For example, an arbitrage opportunity occurs when the BTC/USDC pair is trading at 50,000 USDC, and one ETH equals 2,000 USDC, but the BTC/ETH pair is priced inefficiently at 30 ETH instead of 25 ETH.

In such a scenario, you execute the triangular arbitrage strategy with the following steps:

  1. You deposit funds to the exchange and purchase 1 BTC for 50,000 USDC.
  2. As the second step, you trade the BTC/ETH pair to convert your Bitcoin to 30 ETH.
  3. Finally, you sell the 30 ETH for 60,000 USDC.

As you can see, this opportunity would have generated you 10,000 USDC in profits with a 20% ROI on three trades. This type of opportunity is very infrequent and must be jumped upon immediately before the exchange’s algorithm quickly corrects the error.

3. Yield Arbitrage

Yield arbitrage allows traders to profit on interest rate inefficiencies between two DeFi lending or staking platforms.

Since the decentralized finance industry is quite new – yet growing at a rapid pace – it’s not unusual to spot irregularities related to interest rates or yields.

With yield arbitrage, a trader borrows funds in a stablecoin with a lower annual percentage yield (APY) for borrowing, exchange it to another stablecoin with a higher supply APY, and uses the latter cryptocurrency to lend funds to others.

An example yield arbitrage strategy goes as follows:

  1. On a DeFi lending platform, DAI’s borrowing APY is 5%, while USDC’s supply APY is 10% (both are USD-pegged stablecoins).
  2. You deposit USDC to the platform and use it as collateral to borrow DAI.
  3. After that, you exchange your DAI back to USDC.
  4. As the final step, you lend the USDC to others to make a profit on a 5% spread between the two coin’s APYs.

While this crypto arbitrage strategy can work excellently on a single or across multiple DeFi lending protocols, it is crucial to take gas fees into account, which have been notoriously high on Ethereum lately.

Closing Thoughts

When the right opportunities are identified and executed quickly, arbitrage strategies can provide lucrative profits to traders.

However, it’s important to note that the simplest opportunities are the easiest to discover. For that reason, you need to act fast before they disappear.

Furthermore, while some crypto arbitrage opportunities may seem highly profitable at first glance, other factors (e.g., excessively high trading costs or when an exchange charges a high fee for withdrawals) may decrease your earnings or even lead to losses.

For that reason, you need to take everything into account and research every opportunity extensively before executing your crypto arbitrage strategies.

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