Crypto Arbitrage – Part II 

Yesterday we talked about what crypto arbitrage is; there are a few types of crypto arbitrage available to retail investors today: 

Cross-Exchange Arbitrage: As it sounds, this is where an investor buys an asset on one crypto exchange and sells it on another. This is possible because the same asset can have different prices on different exchanges. For example, note BTC/USD on Coinbase vs. Bitstamp:

Doesn’t seem like much of a difference, however if you bought at a lower price and sold at a higher price thousands of times a day, it might add up to real money. The commission structure would have to justify the multiple transaction cost of doing business. This is why someone owning an exchange might have an advantage here. 

Spatial Arbitrage: This is where you are buying and selling at different exchanges in different parts of the world. Different countries will have different demands for certain crypto pairs, and might be priced at a premium due to the demand. There might also be more demand during daylight hours for a coin in a certain part of the world which can increase the spread between pricing, offering a better arb play. 

Decentralized Arbitrage:The rise of decentralized finance (DeFi) has brought about the creation of decentralized exchanges, such as Uniswap, Balancer and Curve, a type of exchange operated by a global network of computers rather than a central operator. Most decentralized exchanges, rather than maintaining a central order book where buyers and sellers can place orders, use a collection of liquidity pools, where the crypto asset price is dependent on those who provide liquidity to the pools. 

When used in conjunction with a crypto exchange like Kraken, traders are able to spot arbitrage

opportunities in pools that experience a price slippage due to large transactions.

Triangular Arbitrage: Triangular arbitrage involves taking advantage of price differences between three currencies. For example, a trader could buy Bitcoin in a fiat currency like the USD then sell it to another, like the euro. To finish his trade, he could then exchange those euros back to USD. This is a bit more complicated, but given favorable exchange rate differences, it expands the possibilities of crypto arbitrage significantly. . 

If this sounds like a lot of work with sizable risk, you’d be right. This is why Arbitrage is best left to a bot to trade this on your behalf. In tomorrow’s newsletter I’ll discuss some different bot services that are available for executing arb trades.