Cryptocurrency Arbitrage: Exploiting a difference in price between identical currencies across different markets/exchanges
As you are probably aware there are many different cryptocurrency exchanges and markets that are currently used. Different countries have different access to exchanges, and within countries there is competition between exchanges. This creates inefficiencies in the market. Because this assent class is so new it is very common for there to be relatively large differences in price between exchanges.
Some brief background information regarding how markets work will help to explain this phenomenon and help you better understand how to profit from it. Cryptocurrency markets are a pure supply and demand priced asset. Since there is no underlying asset backing most cryptocurrencies, for example bitcoin, it is only worth what people are willing to pay for it. As more people want to buy any particular cryptocurrency, hence the demand is increasing, the price will be driven up. Since the supply is limited, the increase in demand will have a direct impact on price. As more people want to sell, and the supply remains predictable and relatively constant, the cheaper the cryptocurrency will become.
Since certain exchanges are more popular than others, this creates a discrepancy in demand between exchanges. If more people use Coinbase, and more people are looking to buy coins there, the price will be higher. There is often a few percentage points difference in price between Coinbase and other exchanges. One way to profit from this (and also make the cryptocurrency market more efficient) is to set up an arbitrage trade. Let’s say for example, you have an account with Exmo cryptocurrency exchange or CEX.IO, as well as Coinbase (which usually has higher prices). On an average day there will be a few percentage points difference between prices for currencies across the two exchanges. On days of very large price swings the differences will be even higher. For this example we will use the price of Bitcoin. Lets say Bitcoin is trading at $16,000 on CEX.IO while at the same time it is trading at $16,400 on Coinbase. One can take advantage of this by buying bitcoin on CEX.IO and subsequently transferring it to their wallet on Coinbase to sell it there at the higher price. This will net them roughly $400 before fees. This is a different way to trade cryptocurrencies to generate more predictable returns. Other currencies like Litecoin and Ethereum also have must faster clearing times which can make them more attractive for arbitrage. Furthermore, the price differences between exchanges still exist for these coins as well.
These general steps will help you succeed: Look at various prices of different cryptocurrencies across different exchanges that you have accounts with. Signing up for an international exchange will also help you find these differences. Look at coins with fast clearing times (minutes not hours). Buy the coin on the exchange that has the lowest price. Once it is in your wallet on that exchange, transfer it to your wallet on the exchange with the higher price. Say you can buy 1 Ethereum for $900 on Exmo. Transfer that 1 Ethereum to your wallet on Coinbase where you can sell it for say $935.
This doesn’t net huge profits all at once but you can essentially do this multiple times a day. You will want to wait until you have settled funds before you try doing this. Initial deposits are sometimes held for a few days by exchanges. They will not let you immediately transfer anything out. Check with whatever exchange you use for details. Cryptocurrency transactions are always settled immediately so no need to worry once you get started. Wait for your initial local fiat currency transaction to clear and settle, then you can begin your arbitrage.