What is arbitrage trading in crypto?
Arbitrage trading in cryptocurrency is when a trader buys a cryptocurrency for a cheap price from once place and then sells it for a profit on another exchange to take advantage of price differences. Bitcoin arbitrage trading is one of the easiest ways to make a profit in trading bitcoin with minimal risks.
Is arbitrage trading legal?
Arbitrage trading is legal as long as you are trading in countries where bitcoin is legal. An arbitrage trader is merely taking advantage of the price difference between multiple exchanges to make a profit.
How does arbitrage trading work?
Cryptocurrency sells at a premium in developing markets and countries with economic problems such as Zimbabwe and Venezuela, whereas cryptocurrency in developed nations sells for a price closer to its real market value. Traders with access to foreign markets can take advantage of the price difference and demand by buying bitcoin for a low price in developed nations and selling for a higher price in developing nations or countries without a developed crypto ecosystem.
How to get started with bitcoin arbitrage trading
When you want to buy bitcoin for a low price and sell for a higher price at a different exchange. The first thing you will need to do is to open an account at all exchanges which support your payment method. After signing up at the different exchanges, you will have to buy bitcoin at the exchange with the cheapest price and sell at the exchange with the most expensive price.
What are the fees involved in bitcoin arbitrage trading?
In addition to looking at the bitcoin price, you will have to look at the trading fees and withdrawal fees of the different exchanges. In order to make a profit, your Buying price including transaction fees must be less than your selling price including transaction fees.
Transaction fees include fees for each trade and withdrawal fees for sending crypto to another exchange.
Bitcoin arbitrage trading in South Africa
In South Africa, you can do bitcoin arbitrage by buying on Coindirect.com and selling on Luno.com or localbitcoins.com.
The trick is to buy using your credit card/cheque card on Coindirect where credit card purchases are cheaper than other payment methods and sell at Luno where bitcoin is sold at the local premium.
At the time of writing buying bitcoin on Coindirect using a credit card would cost you R176,077 vs R178900 on Luno. The more volatile the markets the bigger this price gap gets as local exchanges take a while to adjust to more competitive global bitcoin prices.
How to buy bitcoin on Coindirect using a credit card (or a VISA cheque card)
- Sign up for a free Coindirect Account (simply login if you already have an account).
- Find your way to your bitcoin wallet.
- Click ‘Buy’ and then select ‘New VISA card (EUR)’ from the drop-down.
- Enter EUR value of BTC you want to purchase (more than the minimum limit) or the BTC amount you want to buy and then click ‘Preview Buy’.
- You will receive a quote, press ‘confirm’ before the timer runs out (counts down from 55 seconds).
- Type in your credit card details and pay.
- You will be taken to a page to verify your transaction.
- Finally, you will be redirected back to your Coindirect Wallet once the payment is successful.
How to sell bitcoin on Luno
- Sign up for a Luno account and verify your identity.
- Send Bitcoin from your Coindirect Bitcoin Wallet to your Luno Bitcoin Wallet.
- Either Click on ‘Sell’ in your Luno Wallet and get a quote to see if you will receive more money than what you bought for on Coindirect.com, or
Create a Sell order on the Luno Exchange that is greater than the amount you bought on Coindirect for (including the transaction fee and withdrawal fee).
Once you have sold the Bitcoin for a profit on the more expensive exchange. You need to withdraw money to your bank account (credit card) and repeat the process to keep buying low and selling high whenever a price difference presents itself. The more volatile the bitcoin price the more opportunities to make a bigger profit.
Key risk factors to be aware of:
- It’s best to act quickly to minimise exposure to market movements. As the price difference can vanish before you make trades due to the volatility of cryptocurrency.
- If there are a lot of transactions the blockchain can get congested so it may take some time to transfer your bitcoin from one exchange wallet to another.
- Always make sure you have funds in your credit card to take advantage of price differences in case of sudden price changes. The last thing you want is to not have funds to buy on the cheaper exchange when the opportunity presents itself.