What is Crypto Arbitrage?
Crypto arbitrage is taking advantage of cryptocurrency price differences to make a profit, i.e., buying cryptocurrencies at low prices and selling them for a profit at a higher price on exchanges.
Cryptocurrency prices are different on various applications because there is no central mechanism to determine a price. They all operate independently. Every cryptocurrency exchange has price fluctuations based on demand and supply.
Say if ETH price on Uniswap is 3000.15 USDT and on SushiSwap is 3000.85 USDT, there is an arbitrage opportunity.
Arbitrators play a key role in maintaining real-world prices across applications. In this process, arbitrators act as liquidity providers to the applicant when cryptocurrency prices shoot above real-world prices.
Crypto Arbitrage Opportunity
Cryptocurrencies on different exchanges usually have small price differences. So arbitrage favors users with larger cryptocurrency volumes. But since there are more than 500 exchanges and 3000+ cryptocurrencies, there is always some opportunity, albeit with high risks.
Automated arbitrage using bots can outdo human arbitrators with higher speed and volume. However, with the increasing number of arbitrage bots, there is a lower opportunity to make profits.
Types of Crypto Arbitrage
Crypto Exchange Price Arbitrage: It’s the simplest form where you take advantage of the price of a cryptocurrency between two different exchanges. For example, arbitrage the price differences of Bitcoin on Coinbase and Binance.
Fiat Triangular Arbitrage: Exchange prices for a cryptocurrency with fiat currencies can have differences thus creating an arbitrage opportunity. For example, arbitrage opportunities in Bitcoin-US Dollar (BTC-USD) and Bitcoin-South Korean Won (BTC-KRW) price differences. If BTC-KRW is higher than BTC-USD, you can buy BTC low with USD and sell at higher prices for KRW.
Crypto Triangular Arbitrage: If exchange prices of three cryptocurrencies are such that swapping those cryptocurrencies have an arbitrage opportunity. For example, USDT, BTC, and LTC are priced such that swapping USDT for BTC, then BTC for LTC, and lastly BTC for USDT will result in more USDT than the first swap.
Flash Loans Crypto Arbitrage: Flash Loans are tokens borrowed using smart contracts without any collateral. Flash loans are used to borrow large amounts for a short period of time to make more profit with arbitrage. For example, borrow 200K USDT from a Decentralized Application (dApp) to arbitrage ETH on different exchanges, then repay USDT flash loans keeping arbitrage profits.
Crypto Arbitrage FAQ
- Is crypto arbitrage worth it?
- Crypto arbitrage can be profitable with high volumes of trades done with arbitrage bots.
- Is crypto arbitrage legal?
- Crypto arbitrage is completely legal.
- What is a crypto arbitrage bot?
- Crypto arbitrage bots are computer programs that automate arbitrage with high speed.
- What are the risks of crypto arbitrage?
- Loss from slippage, high trading fees, and sudden price movements can eat into arbitrage profits.
Related Terms
Learn More Crypto Terms