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Bitcoin and Crypto Arbitrage Trading Guide For Beginners

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In recent weeks Bitcoin’s price has been quite rough and unpredictable. It has been a particularly difficult time for people involved in the cryptocurrency market as we’ve watched the value of our investment fall from the peak when we bought the currency.

So, what strategy to choose for difficult times? Hold or try to trade “catching falling knives”? Or maybe try to play with alternative coins? Or maybe sell and come to terms with the loss?

HODL Seems Safe

The safest method appears to be holding (or HODLing). That is where the crypto-investor holds a cryptocurrency for a long time. Holding requires patience, and unfortunately, you have to wait years to get a profit.

People who have held Bitcoin for several years are the biggest winners, and many people were jealous of their profits. After all, who wouldn’t want several thousand Bitcoins that were bought years ago for 50 cents, a dollar or even $100 each? How about if we bought BTC when its price was $8,000, $9,000 or even $15,000 a coin, and ever since the beginning of 2018, the value of our investment has fallen every day? Will the rate return to this level someday? Will you earn 10%, 100% or even 1000%?

Nobody knows whether the investment will pay for itself or we lose more over a few and finally say, I could have sold in 2018 with a smaller loss”. As I mean, holding requires a lot of patience.

Trading Could be too Risky

Trading seems to be the solution, namely the strategy of “catching a falling knife” or hunting for flash crashes. However, trading is extremely risky and is accompanied by a massive amount of stress, and “catching falling knives,” as the name suggests, is a very dangerous game because you can cut yourself badly. It’s not everyone who can stand the mental pressure, and also say “stop” at the right time, while waiting for a price bounce.

In theory, the strategy is quite simple. However, when it comes to practice, we sell our BTC when a series of sales start, buy back at a lower price, then sell on a delicate bounce and buy at the bottom, lowering the exit point. After a few such transactions, we can see how beautifully the amount of BTC in our wallet grows, although it does not necessarily result in turning the value of the investments into fiat.

In theory, we are winning because when the price returns to the previous levels, we have more BTC than before, so, theoretically, we are on a huge plus. However, as I mentioned earlier, in practice things don’t always pan out. Very often, several, such successful transactions make us optimistic, until our the last transaction when we sell our BTC at the lowest exchange rate, and then suddenly there is a quick and robust bounce, and before we even realize that it is not a temporary correction it is in a declining trend, its already reversing, and it is too late. The effect is that when we buy back our BTC, it turns out that we have less than we started with. This causes additional stress, and as a result, many people make a series of mistakes trying to compensate for their loss, losing even more of their accumulated capital.

Let’s Trade Altcoins Instead

So what can we do? Well, the behavior of the cryptocurrency market, in theory, is very predictable. When Bitcoin’s price begins to “go down,” all of the alternative coins lose a lot more when compared to BTC. When the exchange rate of the king of the cryptocurrency starts to bounce and stabilize, the alternative coins price start to climb sharply.

In theory, it’s easy to make money. The problem is that you need to know which currency to pick and when to enter. Unfortunately, this already requires a lot of experience, market knowledge, patience, and nerves of steel.

Is there any way out of this situation? One that does not involve a long and uncertain wait or risk of severe losses and nerves?

Meet Crypto Arbitrage

Yes, the solution is arbitrage on the cryptocurrency exchanges. That means using the price differences of the same cryptocurrency on various exchanges. Arbitrage is the best strategy for trading when there are so many moves on the market. Significant price differences arise for the same cryptocurrency on multiple exchanges.

There are over 220 different cryptocurrency exchanges on the market. These exchanges are not connected, which is why the same cryptocurrency may have completely different prices on different exchanges. These differences are not huge, because they mainly depend on the demand, supply, and volume on a given exchange.

arbitrage_REP-min
Arbitrage on Augur (REP). Same token, 4% difference. Source: Coinmarketcap

Exchange Differences

The norm is differences ranging from 3% to 5% though in extreme cases, even 40% or 50%. Such price differences allow you to generate quite a big profit with a relatively low risk, low stress, and most importantly no advanced market knowledge is required. All you need is the ability to find an offer and transfer funds from one exchange to another. The timing is also critical! In the case of arbitrage, we do not have to wait for profit for years, weeks or even days. We get the profit right now, we simply buy low on one exchange, transfer our cryptocurrency to the other exchange and sell it immediately for a higher price. That is why we wait for profits for a few minutes to a maximum of several hours, it all depends how long the transfer of a given cryptocurrency takes.

How Arbitrage Can Be a Good Solution

This is the perfect solution for people holding a cryptocurrency bought at a high price. For example, we have 0.5 BTC in the portfolio that we want to multiply. We found an opportunity to arbitrage on two exchanges on the BTC / XRP pair. On the exchange A, we buy XRP at the price of 0.00004280BTC, we transfer to the exchange B and sell it immediately for price 0.00004799BTC, earning an almost 12% profit in less than few minutes, and we have 0.56 BTC instead of 0.5BTC. In just a few minutes, we earned 0.06BTC, with an incomparably lower risk in comparison to traditional trading.

The Unfortunate Arbitrage Drawbacks

Of course, arbitrage also has a few drawbacks, but in comparison with holding or traditional trading, arbitrage definitely wins and is currently the best solution.

The most challenging thing in arbitrage is searching for opportunities as there are 220 exchanges and about 6000 cryptocurrency pairs to explore. Then when we finally find a pair on which there is a satisfying price difference, we need to check:

  • How much we can buy on exchange A and what we can sell on exchange B (according to our balances).
  • We need to check the status of wallets on both exchanges before buying, because it may turn out that we will not be able to withdraw or deposit the purchased cryptocurrency.
  • We need to check the transfer cost, as it can often take up a huge part of the profit.
  • The time of the transaction is also very important, as in the case of “forgotten” coins it can be extremely long. After checking all this information, it may turn out that someone has already used the opportunity we wanted to earn money themselves.

We must remember that this strategy also carries some risks and novice investors may make some mistakes that will cost them some of their capital. Here is a list of threats and the most common mistakes:

  1. The most dangerous threat and the mistake is to confuse two different cryptocurrencies with the same abbreviation on two exchanges. You should check the names very carefully to verify they are the same cryptocurrencies. Such a mistake can cost you the loss of all capital! (example: START token vs. STRAT token).
  2. One or both wallets have blocked deposits or withdrawals on a given exchange. Sending cryptocurrency to a blocked wallet may result in forfeiture or freezing of capital for an extended period. Therefore, you need to pay attention to checking the status of wallets.
  3. Transfer time exceeds several days. This threat is most familiar with “forgotten” coins. To avoid this, use the cryptocurrency explorer to check the average confirmation time and how many confirmations are required by the exchange receiving our transfer. There are situations where the exchange requires, for example, 1,400 confirmations and in the explorer, you can see that one confirmation is on average once every 10 minutes. Such arbitrage is risky because the price of this cryptocurrency can change over these few days.
  4. Purchase of too many coins on exchange A, which results in the lack of ability to sell the whole amount on exchange B. Before buying a coin, you should check carefully that after the transaction you do not stay with its excess.
  5. During the transfer, the price may change at exchange B. It is a small threat if we choose the coin correctly. The most common result of such an event is sales with a slightly lower profit but still profitable or with a small loss.

Where to start from

A lot of information to process and work required to find the proper offer can, and certainly does discourage, many traders on cryptocurrency exchanges.

Fortunately, professional tools, such as ArbiTool – Arbitrage Scanner, can help us. It is a great, safe tool that perfectly solves the problems that accompany arbitrage, making this strategy very easy to use.

ArbiTool is a professional and advanced tool but can be used intuitively. You also don’t need much capital to use the tool. For those who are interested, ArbiTool organizes training, and you can sign up here.

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