An exchange arbitrage is a commonly known trading strategy based on the differences between the price for the same asset at different exchanges. Arbitration opportunities open up in the event of a price discrepancy obtained through a chain of sales via intermediate assets. Hence, the discrepancy in prices accumulates over time to finally become quite a significant amount that now is reaching up to 1–3% at the crypto currency market. These arbitrage opportunities in fact exist for seconds, so a trader who uses this strategy on a regular basis would have to search for the best opportunities constantly and then implement them whenever possible. Essentially, the arbitrage is a way for a pro-trader to generate revenue from discrepancies between exchange rates.
Any difference between a classic arbitrage and a crypto arbitrage?
Well, there is basically no difference: the core arbitrage mechanism is the same. But due to extremely high volatility of bitcoin, the risks involved in crypto trading are much higher. BTC last winter’s rally when a rapid increase was followed by an immediate fall down, demonstrated that bitcoin can be easily manipulated, if key stakeholders have sufficient funds. The things are even more complex with less liquid coins that are basically jumping back and forth ten times a day, especially when the market is seeing red.
The risk of a hack or stop of operation is another misfortune that is out there. Unfortunately, up till now no exchange in the crypto space can boast either integration with a professional trader interface, or sufficient liquidity. Finding a more or less stable crypto-exchange becomes a challenge, which probably makes it close to impossible to enjoy the arbitrage strategies making profit out of it.
What are the difficulties exactly?
Apart from that, implementing arbitrage strategies at crypto market involves a number of technical complexities that requires a top-notch and super secure technical execution to get a positive result. Let’s name a few here:
1. Having deposits on several major exchanges (the more sites are covered, the better)
2. Availability of specialized software that monitors arbitrage opportunities
3. Having specific hardware (specially allocated and properly configured servers, minimum ping, etc.) and software that integrates exchanges interacting with them.
All transactions must occur with a minimum delay in relation to each other. Also, the risk of technical errors, failures and delays should be minimized, as it can destroy the profit from the arbitrage transaction.
Are there any solutions out there?
In fact, a number of projects have popped up recently in this space, yet they are all still in early development.
B2BX that ran a successful ICO in late 2017 and now is targeting brokerage houses, liquidity providers and institutional investors. However, the majority of regular individual traders won’t have access to it.
Arbidex is looking to give us the platform integrating liquidity from crypto exchanges into one single interface with a built-in mechanism for automated arbitrage. Deploying a search algorithm for the most favorable exchange rates through multiple exchanges, the platform brings about the opportunity to buy cryptocurrency at a lower rate and sell at a higher. Any purchasing transaction with any tradable crypto-asset will be made at the most favorable rate, while the commissions charged by the platform are lower than regular ones charged by crypto-exchanges at the moment. The project looks pretty legit with 16M raised at their ICO and a solid community behind.
One more player is a Japanese project Liquid with an existing exchange license from Japan authority. They are also targeting to provide liquidity for the cryptocurrency exchange market and create a worldwide order book.
It is too early to tell what platforms aiming to aggregate liquidity and implement arbitrage strategies within one single framework will be the winners and whether these three first movers I’ve pointed to will remain in the lead or lose out to the next wave of fast-followers. Remains to be seen.