Why Crypto Arbitrage Does Not Work For Most People
Crypto arbitrage is not a sure-win strategy. There are many reasons why the strategy doesn’t work.
The central problem with this strategy is that all cryptocurrencies are volatile and hard to predict. They have varying prices, but their volatility means they have low correlations, meaning that they don’t move in the same direction at the same time.
Despite this, cryptocurrency is a promising market that has been around for a rather long time. The central problem with this strategy is that all cryptocurrencies are volatile and hard to predict. They have varying prices, but their volatility means they have low correlations, meaning that they do not move in tandem and can result in big losses for investors.
Arbitrage is when a trader purchases an asset in one place and sells it in another to profit from a deviation in price between markets. This may be easier to understand through an example, like buying Bitcoin on Binance and selling it on Kraken at the appropriate time, making thousands. Many people are excited about the prospect of making money from exchanges, but before you run off to quit your job and start cashing in, make sure you read this article. You should understand what is behind these strategies and what you might be missing out on if things don’t work out the way they do in the article.
Like all money-making strategies, trading crypto is not without its risks. It also requires knowledge and experience to make good returns consistently, with the added benefit of not having to depend on outside influences like traditional stock markets (such as the NASDAQ or New York Stock Exchange).
Today we’ll be discussing some of the most common mistakes that people make when trading crypto arbitrage.
1. There are projects out there with the same name
There are thousands of cryptocurrency tokens on the market. Some of them have very similar logos or codes that can easily be confused with others, just like how many sports teams have the same or near-identical code names/symbols.
A project ‘SIA’ is similar to another project ‘SAI’, so be careful not to confuse the two. More examples exist such as ($HNC (HellenicCoin)) and ($HNC (Huncoin)), or ($BTCS) Bitcoin Scrypt and ($BTCS) Bitcoin Silver. Many people sometimes make mistakes such as sending funds to the incorrect wallet address. Which will mean your money is gone forever.
2. Exchange wallets offline
Transactions will sometimes be disabled or suspended on cryptocurrency exchanges for the platform as a whole or individually. It could be for a variety of reasons, from a security concern to general frugality. It could happen just when you want to execute a juicy trade and put a stick in your wheel
In most cases, cryptocurrency exchanges have a page where you can find out if your wallet is offline. In addition to this, they might also give an approximate time when it will be back online so you are left with nothing to trade or exchange.
The second important thing to do is ensure that your tokens are on the same blockchain as other users.
Cryptocurrencies often need to be moved from one blockchain to another which can sometimes lead to change in wallet address formats. In the case of EOS, the currency was transferred from the Ethereum blockchain into its mainnet as a result, thus creating different wallet addresses that needed to be updated.
Some factors for launching a crypto arbitrage campaign are found below:
3. Changing deposit and withdrawal fees
A withdrawal fee is a fee charged in the process of withdrawing funds from an exchange. Some exchanges are charging large fees for small withdrawals, which vary depending on the amount of BTC being withdrawn. Many big exchanges, like HitBit, have high withdrawal fees. To withdraw Bitcoin from an exchange, you’ll typically need to pay 0.00085 BTC/transaction which is quite a bit for trading one item. As exchanges are having a harder time competing with crypto, they are also charging more for certain services. It’s paramount that you read up on the deposit & withdrawal fees of both exchanges to ensure your profit can keep growing. A lot of traders make quick decisions without doing this which results in losing all their potential profits.
You can calculate and know where to find these offsetting trades by understanding the process and procedures of arbitrage. Open a spreadsheet or just jot the numbers down on a piece of paper. You’ll find all the formulas you need for an arbitrage trade as well as general information to help with calculating sales revenue for your business.
4. There can be a lack of volume
First, it is important to understand that you won’t be able to “profit from arbitrage opportunities without volume.” To execute an arbitrage trade, you first need sufficient volume.
As of today, hundreds of cryptocurrencies have been delisted because they did not meet trading volume requirements.
“This means that if you buy the cryptocurrency on an exchange like Binance with the intention of selling it on another exchange like Kraken, but no one trades you, you might end up with a lot of coins that don’t sell and lose a considerable amount of your money.”
Unfortunately, with arbitrage trading, there’s always the risk that your long-term gains could be taken away quite easily by one bad trade. It might help if you were to take smaller steps initially and establish an ongoing strategy.
Furthermore, a coin’s volume and last price can let you determine the best selling price. A coin’s ask, bid and depth are more important than the last price
You can avoid running into that issue by keeping an eye on the exchange order book and ensuring it is still.
Ensure that the amounts in this transaction are significant – they shouldn’t be just small amounts of ‘dust’ to trick you. Volume is simply how many coins were traded in a given day. From a daily perspective, it would be the number of coins used and from a transactional perspective, it could be how much money was made from the transaction. If you can’t find the volume in either of these cases, then that leads to not considering trading at all
5. Beware of pump and dump schemes
Pump and dump schemes are a part of the cryptocurrency market. Though these scams can’t always guarantee success, they provide much-needed liquidity to otherwise risky transactions. This is a form of investment fraud by feeding false information to order-book traders, fake positive news to media outlets, and impacting the price of the coin with trading patterns intended to generate greater profits for an individual.
In the crypto market, “Pump and Dump” schemes are a topic that has been prevalent for a long time. These schemes represent anon activities in the crypto world while also serving as a way to make profits off other people’s losses. When successful, these groups leave people holding the bag who bought at the peak of prices to never be able to sell their cryptocurrency
One way to check if you might be investing in a P&D scheme is by examining some technical aspects of the project.
A good way to get started with technical analysis is to take a look at volume & 1-minute charts, especially after an asset has had its bar close near the top of the display. This will give you some clues about how it may be behaving near term.
6. Your account is blocked
This happens a lot in the crypto trading world and anyone who knows crypto Twitter will be familiar with exchange users who deposit funds to make a sweet trade but miss the opportunity because of the exchange’s need to approve.
If your money can’t be moved into what you need, it’s always great to talk with the representative on the support line and figure out how to get help. They ask for some proof-of-funds documents so they can verify your funds and unlock them.
Ultimately, you’ll lose out on trading time. This is inconvenient in a market that moves so quickly.
Players can usually do very little to counter this except depositing smaller, more frequent denominations. This may also result in higher fees. As with any financial institution, make sure you are familiar with your bank’s regulations before making a deposit decision.
Cryptocurrency exchanges that aren’t regulated pose a great problem, and while some would say that this is a good thing it’s not always the case.
If your assets are stolen, there is no good reason for this to happen. However, if the platform disappears or has vague requests for additional information to access your funds, it can be a sign of suspicious activity.
There are concerns that exchanges may not be holding customer funds in the case of a system hack. However, they have managed to keep the number of such cases low. The idea is always to keep your account balances safe so you can trade without any issues.
If you plan to arbitrage then this will affect you the most! as you will be using lots of exchanges, some of them which are not so established.
7. Trading fees always changing
Exchanges are always having updates with the fees, which can catch you out!
You will be using your favorite exchange then suddenly you will be paying loads more.
Exchanges have a habit of constantly adjusting their trading fees so you could be enjoying low fees on your favorite pair one day and the next you’re forking out a lot more. One time coinbase increased their fees massively without warning, it was by 150%! this was in 2019
The best way to avoid being caught out is to check it all the time.
8. Timing the market is very hard
There are so many opportunities, with this but the most important factor is timing, without this, you will not make anything. And you need to be good at it.
The problem is the crypto market is very volatile which is hard for everyone and anyone to time.
Conclusion: Crypto arbitrage is not worth it
So in this article, we have gone over all the risks and reasons to avoid arbitrage, and we think that in conclusion, you will agree that it is not worth it overall.
And yes some traders do make money with this, but they are not the majority, they are the minority and the very small amount, which a huge percentage just end up losing thousands of dollars with this.
Crypto is such a hard trading area as it is, without making it even harder with crypto arbitrage.
You need to have constant reminders, of trade fees, withdrawal fees, prices, etc etc. All the time all year round that you do this method.
We think that this is a net negative for most people, and you would probably make more just doing DCA and holding your portfolio.