Dipping toes into the realm of financial markets to profit from price discrepancies across different exchanges may be commonplace in everyday trading activities. But buying an asset in one market then selling it on another for a higher profit is not without risk or confusion.
There is a wide range of exchanges requiring less stringent verification to begin trading top cryptocurrencies. With that variety in trading platforms, crypto arbitrage presents countless opportunities for traders. It does not take a genius approach to realize that you can buy crypto at a lower price from one platform and sell it at a higher price on another exchange.
While this strategy is possible, there are some barriers that present risks and even obstacles. Here’s a look into common risks and ways to avoid them.
Regulatory Considerations
Legal barriers make it challenging to leverage the vast range of cryptocurrencies available for arbitrage. While these laws vary across geographic locations, there is a general limit to the number of exchanges and currencies you can invest as a trader.
Therefore, it is possible to attempt specific arbitrage opportunities, but it is also common to have these plans thwarted by legal restrictions. The careful path to mitigating such occurrences is identifying how to ethically navigate through possible legal matrices.
Deposit and Withdrawal Fees
Few, if any, legal regulations restrain exchanges from inflating deposit and withdrawal fees. Being charged significant amounts of Bitcoin to perform transactions for crypto arbitrage traders will certainly knock off a chunk of profit.
Therefore, you’re going to want to read through the deposit and withdrawal fees of both exchanges you plan to use. Ideally, have a spreadsheet to note down price discrepancies against charges. If you don’t perform a comprehensive fee analysis, high costs may render the whole crypto arbitrage pointless.
Trading on/in Time
Despite several available opportunities to make money from crypto arbitrage, you must execute your strategy quickly in order to make a significant profit. Given its volatility, the crypto market is prone to large market swings, affecting prices.
Transactions that require a long wait can disappear before you complete your trades. Significant market movement can happen anytime, often alongside some of life’s basic activities like sleep, grabbing a coffee, or a short break. If you’re slow off the mark, you might want to utilize tailored arbitrage tools to leverage such opportunities.
Platform Bottlenecks
Sometimes your account just gets blocked, or your deposit gets stuck and needs manual approval. This often happens in the crypto world, and frustrated users who get their funds held up miss great arbitrage opportunities.
Some exchanges take a lot of time and back-and-forth before an issue is resolved comprehensively. At times, you might need support documents in some scenarios just to unlock your funds. Whatever the hurdle, you lose valuable time and money and may need additional funds to complete the trade.
While there is a good number of trusted exchange platforms, this problem may be encountered on less reputable crypto exchanges. In extreme cases, they disappear with your assets for no sufficient reason and follow up with vague requests to access your funds.
At present, regulatory loopholes give users little room to appeal their issues. Also, getting responses from bots when you need personalized assistance the most doesn’t help. For good reason, it is recommended to deposit small amounts rather than a lump sum. Although you will pay more in fees, it might be preferred over endless issues management with possibly unregulated platforms.
Insufficient Volume
Before getting into crypto arbitrage, it is crucial to ascertain that the exchange has a ‘running over’ volume. Hundreds of cryptocurrencies have been delisted because of shallow exchange volumes. In other words, you could be buying a specific volume of coin X on Coinbase then selling it for profit on Binance. If no one buys the coin, you’ll end up with lots of assets that you cannot dispose of.
With crypto arbitrage, incredible opportunities just need one loophole to skew the entire strategy. At the same time, the coin may have sufficient volume, but you cannot sell it at a price that suits you. To avoid running into this risk, keep an eye on the exchange and ensure the transactions move. Aside from examining daily volume, scrutinize the exchange from a transactional perspective.
Artificial Inflation
Traders are sometimes scammed by groups feeding the crypto market with false information or artificially inflating the price of an asset to sell several coins for a profit. A fair number of these “pump and dump” groups set out to carry out this strategy on a massive scale.
Traders who buy these cryptos are eventually left with lots of coins and nowhere to sell afterward. One fruitful way to identify pump and dump schemes is utilizing sufficient technical analysis. Market sentiment following a social media post from an influencer does not outweigh economic and geopolitical factors.
Offline Exchange Wallets
It is not uncommon for exchanges to disable individual wallets or the entire platform. The reasons behind this action could be general maintenance or security concerns. If it happens just before you perform an arbitrage, you would hit a dead end.
Many cryptocurrency exchanges have a dedicated tab to notify you whether the wallet you need is online, and if not, the time it will be back online. Aside from checking that page, you also need to confirm whether the exchange provides tokens in one blockchain. Cryptocurrencies moving from one blockchain to another could generate two varied wallet address formats and jeopardize your arbitrage opportunity.
Bypassing the Pitfalls
One significant defining element of crypto arbitrage is that traders rely on discrepancies between exchanges – not the overall price of the instrument. With numerous exchanges, arbitrage comes with lots of opportunities coupled with significant risks.
Fortunately, it is possible to bypass these practical barriers that jeopardize profitability. At times, it is possible, even if rare, that the market will correct arbitrage pitfalls otherwise overlooked.
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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.
