You’ve probably heard of crypto arbitrage and are wondering what it’s all about. Now, think of any business out there. Their goal is to make a profit. Typically, they buy items at a lower price and sell them at a higher price to generate a profit. That’s why you can buy a bag of rice at different prices, depending on the seller.
In the cryptocurrency world, a similar principle applies because coin prices vary across different exchanges. That price difference between exchanges or markets is where arbitrage traders make their money. In this article, you will learn all the deets about Crypto arbitrage and how to make money with crypto using the arbitrage trading strategy.
What is Crypto Arbitrage?
Crypto arbitrage is a trading strategy that takes advantage of the price difference of the same cryptocurrency across different exchanges. Simply put, arbitrage traders buy a coin from one exchange and sell it at a higher price on another exchange.
For instance, you can buy Solana (SOL) with Naira for ₦250,000 on one exchange and sell it instantly for ₦260,000 on another exchange to pocket the ₦ 10,000 difference.
Arbitrage is a trading strategy that originated from traditional finance markets, but crypto traders also use the strategy because coin prices fluctuate every second. The goal is to identify price differences across various crypto exchanges and capitalise on them.
How Does Crypto Arbitrage Work?
Still confused about how crypto arbitrage works? Meet Bayo, a crypto trader who notices that the price of 1 Bitcoin (BTC) on Exchange A is $109,500, but the same BTC costs $109,700 on Exchange B.
This means there is a $200 price difference between the two exchanges. So, how does Bayo capitalise on the price gap to generate a profit? By buying 1 BTC at a lower price of $109,500 on Exchange A and selling the same BTC for $109,700 on Exchange B.
At the end of the trade, Bayo is $200 richer (minus the fees). That is how crypto arbitrage works. Since there are at least 10 top crypto exchanges for Nigerians, Bayo has numerous opportunities to profit from the price differences across these trading platforms.
Here’s a quick breakdown:
- Find the Price Gap:
Check different exchanges (like Quidax, Binance, or VALR) for price differences. - Buy Low:
Purchase the coin on the platform where it’s cheaper. - Transfer:
Move the coin to the other platform (or sell via P2P). - Sell High:
Sell it at the higher price. - Profit:
Subtract transfer and withdrawal fees, and what’s left is your gain.
Pretty straightforward — but timing and fees are key. Even a ₦200 difference per coin can add up if you trade smart.
Why are Crypto Exchange Prices Different?
You are probably wondering how two exchanges can list the same coin at different prices. That’s because, unlike cash, the price of cryptocurrencies isn’t regulated by the government. This means that cryptocurrencies don’t have a set value, and their prices are determined by how much people are willing to buy or sell them.
Exchanges value a coin based on the most recent price at which a coin was bought and sold. This means that if $50 is the most recent price someone has paid for a coin on the exchange, the exchange would assign the value of that coin as $50.
So, if the last price of purchase is higher or lower on another exchange — say $55 for the same coin — that exchange will set the amount as its own price for the same cryptocurrency. Hence, the difference.
Plus, different countries have varying coins in high demand, which could also influence prices. For instance,
- On Quidax, many Nigerians trade USDT for naira, and vice versa.
- On a South African exchange, users might prefer BTC or ETH pairs more.
- On DeFi platforms, liquidity (money available for trading) also affects prices.
So prices don’t always align, and that’s the gap arbitrage traders look for.
Why is Arbitrage Seen as a Low-Risk Crypto Trading Strategy?
Crypto arbitrage is considered low-risk because traders don’t need to predict how a coin will behave in the future. Unlike other forms of trading, the coin’s trend does not affect its profit.
It’s one of the few strategies in crypto trading that doesn’t depend on market direction. You’re not betting on whether Bitcoin will rise or fall. Instead, you’re simply catching small differences to stack profits.
So, no need for technical analysis or serious reading of charts because you only need to monitor exchanges and spot the price gap between them.
This is also why it’s one of the easiest strategies for beginners to make money in crypto. But this doesn’t mean crypto arbitrage is without risk. Traders need to be very fast to spot the price gap before it closes. They also need to consider the transaction fees across the different exchanges.
Types of Crypto Arbitrage Trading
There are various types of arbitrage strategies employed to generate profits in cryptocurrency. The most common arbitrage strategies used by Crypto traders are:
Exchange Arbitrage
This is the simplest and most common type of arbitrage strategy. In this method, a trader takes advantage of the price difference between two exchanges. Just like Bayo buying a coin from another exchange and selling it on Quidax for a higher price.
Spatial Arbitrage
This involves taking advantage of the price difference between two exchanges in different countries. For example, a trader based in Nigeria buys a coin that’s in high demand in Africa for a lower price on an international exchange. He then sells the coin for a higher price on an African exchange.
Triangular Arbitrage
This one is for the math lovers 😅. In triangular arbitrage, traders deal with 3 different cryptocurrencies. For instance, the Quidax Token (QDX), Ethereum (ETH), and BTC.
Now, let’s say Bayo, our crypto trader, has QDX in his crypto wallet. Then he finds out he can get more QDX tokens if he swaps with BTC using the Instant Swap feature on Quidax. He also finds out he can get more BTC if he buys with ETH.
How does he connect the dots? To maximise his profit, Bayo can:
Buy ETH with his available QDX coins → Use the ETH he purchased to buy BTC → Use the BTC he purchased to buy QDX.
With this strategy, Bayo would end up with more QDX than he originally had without spending extra money.
Decentralised Arbitrage
To understand decentralised arbitrage, you first need to understand decentralised exchanges. These are crypto exchanges that directly connect buyers and sellers to each other through liquidity pools (a collection of crypto held in a smart contract).
So, instead of them trading with an exchange using a centralised order book, buyers and sellers can connect without an intermediary. Popular examples of decentralised exchanges are Uniswap, SushiSwap, and PancakeSwap.
Now, let’s get back to decentralised arbitrage. This happens when traders take advantage of the price difference between two liquidity pools.
For example, a trader can notice that the ETH in a BTC/ETH liquidity pool is valued at a lower price than the ETH in an ETH/LTC liquidity pool. He can then buy ETH from the BTC/ETH pool and swap it for ETH in the ETH/LTC pool for a profit.
However, this arbitrage trading model is quite advanced and is more efficient using automated crypto trading bots to find the best prices across exchanges.
The Risks of Crypto Arbitrage
Although crypto arbitrage is a low-risk form of crypto trading, it’s still easy to lose money. Some of the risks involved are:
Execution Risk
This is a fancy term used to describe a trade not going smoothly because of bad timing. Since the gap between prices doesn’t last long, if you make a trade after the gap closes, you may have no profit or, in some cases, lose money.
Slippage
Slippage occurs when the price you buy/sell a coin is lower than what you expected. You are at risk of slippage if the price you want to buy a coin drops during the transaction. So, you need to move fast and use an exchange like Quidax that completes your trades in seconds.
Liquidity Risk
Liquidity is the ease with which trading occurs on exchanges when trading crypto or converting crypto to local currency. Since arbitrage trading requires execution speed, always choose coins and exchanges with high liquidity.
Security
Not all exchanges are secure. That’s why you should only use trusted exchanges like Quidax when trading.
Transaction Fees
Exchanges charge different fees for depositing, withdrawing, and trading. It’s important to track how these fees may reduce your profit margins when doing arbitrage.
How to Start Crypto Arbitrage on Quidax
If you want to arbitrage trade, Quidax makes it simple. Here’s how:
- Sign up or log in to Quidax.
- Fund your wallet with Naira or crypto.
- Check live coin (and coin pair) prices on Instant Swap or the Quidax Order Book and compare with other rate exchanges.
- Buy low, transfer, and sell high.
It’s that easy. You can even monitor price differences directly on Quidax P2P, an open market with the best rates and deals.
Final Thoughts
Crypto arbitrage is a relatively easy way to make money from crypto. It’s a smart-trading hustle that rewards sharp eyes for spotting price differences and fast fingers for executing trades. However, it is not a get-rich-quick scheme.
With platforms like Quidax, you get a safe, fast, and easy way to move your coins instantly to take advantage of arbitrage opportunities. Sign up on Quidax now to catch the next price gap and potentially lock in some cash.
Disclaimer: This content may cause extreme FOMO (Fear of Missing Out). Side effects of investing include sudden wealth (or, you know, the opposite 😢).
Please do your own research (DYOR) or speak to your financial advisor before making any decisions.
