Many traders are excited about the prospect of making a few dollars from price differences between exchanges, but before you quit your job and start cashing in, you should absolutely read this article and understand why you should carefully consider whether it is for you.
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As with any money-making vehicle, using crypto arbitrage is not without risks, and there are many things to learn in order to effectively employ this strategy and consistently make a good return, so today we’re going to discuss some of the more common pitfalls that people encounter when trading with crypto arbitrage.
Top 6 Risks Associated with Crypto Arbitrage Trading
Every method of cryptocurrency trading entails some level of risk.
1. Projects That Share The Same Name
There are thousands of cryptocurrency tokens available for purchase, many of which have similar—or, in some cases, identical—ticker symbols. A good example of this is the project ‘SIA,’ which is an application for decentralized cloud storage solutions. Its symbol is very similar to another project called ‘SAI,’ and if you confuse the two, you will lose all of your coins. If you’re a trader, this may seem like basic information, but it becomes significantly more concerning and dangerous when you realize there are a number of projects with identical ticker symbols, such as Binance and the project ‘CyberMiles,’ which has the ticker $CMT, and some other cryptocubes.
There are numerous other examples, such as $HNC (HellenicCoin) and $HNC (Huncoin), as well as ($BTCS) Bitcoin Scrypt and ($BTCS) Bitcoin Silver. This list could go on and on, but you get the idea that this is a common issue, especially among newer traders. Worse, exchanges will not refund you if you make the mistake of sending funds to the incorrect wallet address.
Simply consider the price and volume of both options to avoid making this mistake. If the price on one exchange appears to be suspiciously low and you have your doubts, it is most likely the incorrect symbol. A final check to ensure you’re arbitraging with the correct symbols is to compare the logos of each project – if they’re different, it’s not the same project.
2. Exchange Wallets On A Different Blockchain Or Offline
Exchanges may choose to disable their cryptocurrency wallets for the entire platform or individually at their discretion. This could be for a variety of reasons, ranging from a security concern to general wallet upkeep. It could happen right when you’re about to execute a lucrative trade and throw a wrench in your plans.
Most cryptocurrency exchanges will have a fixed page where you can find out if the wallet you need is online or not, as well as when it should be back online, so it is always worth checking this page before making any trades.
The second thing you should do is double-check that the tokens are available on the same blockchain as the exchanges.
This is because cryptocurrencies can move from one blockchain to another, such as when EOS ($EOS) moved from the Ethereum blockchain to its own mainnet, resulting in two different wallet address formats.
Again, these are just a few of the factors to consider when considering using crypto arbitrage.
3. Exorbitant Deposit And Withdrawal Fees
It’s no secret that exchanges love their withdrawal fees. For example, if you want to remove your Bitcoin from HitBit, you’ll be charged 0.00085 BTC for the transaction, which is a significant portion of your cryptocurrency.
That is why you should research the deposit and withdrawal fees on both of the exchanges with which you trade. If you don’t do this, you risk losing all of your potential profit (and more) in fees alone, rendering the entire thing pointless.
To avoid this issue, simply calculate the total expenses before executing an arbitrage trade. Open a spreadsheet or scribble the figures on a piece of paper. Here’s a handy tool to get you started: it lists all of the fees for most major exchanges.
4. Lack of Volume
Prior to beginning arbitrage, ensure that there is enough volume on the respective exchange for you to effectively execute the trade. Hundreds of cryptocurrencies have been delisted as of today due to the low trading volume. That is, if you buy X coin on Binance with the intention of selling it for a profit on Kraken, but no one buys, you may end up with a bunch of coins you can’t sell and lose a lot of money.
You can have a string of great trades with arbitrage, but all it takes is one to go wrong to put you back at square one, if not worse off than when you started! Furthermore, even if the coin has volume, you will be unable to sell it at a price that is acceptable to you! The ask, bid, and depth prices are far more important than the final price.
You can avoid this problem by keeping an eye on the exchange order book and determining whether or not transactions are moving. Check that these are significant transactions and not just small amounts of ‘dust’ being moved around to fool you into thinking the exchange is active. Check out the coin’s volume on a daily basis, as well as the volume from a transactional standpoint. If you can’t find volume in either of these, don’t think about the transaction.
5. ‘Pump and Dump’ Schemes
The cryptocurrency market would be different if ‘Pump and Dump’ schemes did not exist. This is a method of defrauding traders by artificially inflating the price of an asset through the use of false information, fake positive news, and price action, with the ultimate goal of selling a large number of those coins for a large profit.
There are a few groups that exist solely to carry out Pump and Dump schemes, and whenever they are successful, the people who bought the cryptocurrency last are left to ‘hold the bag,’ virtually unable to sell after that.
A little technical analysis can help you ascertain if you’re investing in a P&D scheme.
We’re not going to teach you technical analysis right now because that would require its own article, but in summary, you can get clues by looking at volume and 1-minute charts, among other T/A indicators.
6. A Stuck Deposit
Your deposit can get stuck and require manual approval, or your account could simply get blocked. This happens all the time in the crypto trading world, and anyone who follows crypto twitter is familiar with frustrated exchange users who have deposited funds in order to make a good trade but are unable to do so because the exchange needs to approve the deposit. It can often take days of back and forth between the user and the exchange to figure out what happened, and you will usually be required to provide some kind of proof-of-funds document to unlock your funds. In any case, you lose a lot of valuable trading time, which is inconvenient in such a fast-moving market.
In general, there is little you can do about it, but some people have reported having fewer issues when depositing smaller fractions of their funds rather than one lump sum, so that is something to consider. However, you will also end up paying more deposit fees, so the choice is yours.
Some cryptocurrency exchanges are ‘unregulated,’ which can have advantages and disadvantages. In theory, these platforms can take your assets and then disappear for no apparent reason, or with vague requests for additional information in order to access your funds. There have also been horror stories about exchanges simply closing shop, taking the users’ money and disappearing. While these are not common occurrences, they are also not unheard of. This affects arbitrage traders the most because they are more likely to trade across a large number of platforms, some of which are not as trustworthy as others.
Now is a good time to remind all cryptocurrency traders to keep their funds in a cold wallet. This is a habit that everyone should develop, and it is a rule of thumb among crypto veterans. Having complete control over your funds means that no nefarious hackers will be able to access them.
7. Trading Fees
Exchanges have a habit of constantly adjusting their trading fees, so you might be paying low fees on your favorite pair one day and a lot more the next. For example, in 2019, Coinbase Pro increased their fees by 200 percent for traders with ‘low volume.’
Maker and taker fees both increased significantly as part of the overall overhaul, adding to the frustration. The only way to avoid being caught off guard by this is to simply check the fee structure on a daily basis.
Despite the fact that there are numerous opportunities to snag a good trade and make some money with this strategy, timing is crucial, and you must be able to execute your trade quickly if you want to reap the benefits. The cryptocurrency market is prone to wildly fluctuating from one second to the next, making it unsuitable for arbitrage, which brings us neatly to our conclusion. Investing in cryptocurrencies effectively often necessitates a significant amount of time and patience.
Crypto Arbitrage Might Not Be The Ideal Option For You
We’ve gone over some of the pitfalls that traders will face when engaging in crypto arbitrage, and as you can see, they’re quite serious. And after reading this, you might be wondering if it’s even worth your time to get involved. While some traders have been successful in executing arbitrage trades, for the most part, exchanges will get in the way at some point. There are simply too many moving parts in the cryptocurrency trading space that must work in unison and continuously to allow you to execute your trades, and is that a risk you want to take? Unregulated exchanges can easily hold or simply take your money, and using regulated platforms often results in slow-moving deposits and transactions, which can also put a kink in your wheel.
In addition to this, you must be able to consistently see prices across a variety of platforms and act quickly. As a human, you are physically incapable of processing all of that information 24 hours a day, seven days a week, and you will, unfortunately, miss out on many opportunities due to sleeping, eating, or any other of your daily activities.