The straightforward guide to cryptocurrency arbitrage

Buy low, sell high. Cryptocurrency arbitrage sounds easy in theory—but that isn’t always the case.

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Rebecca Low

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With cryptocurrency markets operating across exchanges worldwide, there can sometimes be significant price differences between platforms. Cryptocurrency arbitrage allows you to take advantage of those price differences, buying crypto on an exchange where the price is low and then immediately selling it on another exchange where the price is high.

However, there are several important risks and pitfalls you need to be aware of before you start trading.

What is cryptocurrency arbitrage?

Cryptocurrency arbitrage is the practice of profiting from price differences for the same cryptocurrency across different markets. The concept of arbitrage trading is not a new one and has existed in stock, bond and foreign exchange markets for many years. Although professional market makers and algorithmic trading firms help keep prices aligned, temporary pricing differences can still occur between exchanges, trading pairs, regions and market structures, creating opportunities for arbitrage traders.

Example: A simple example of crypto arbitrage

To explain how arbitrage works, let's look at a hypothetical example. Let's assume we have 2 exchanges that both list Bitcoin: Exchange A is a major exchange with a high trading volume, while Exchange B is a smaller exchange with less trading volume.

Now, let's assume there's an important announcement that's likely to encourage people to buy BTC, such as the US Internal Revenue Service announcing that all BTC deposits will never be subject to tax. This prompts widespread demand for BTC, and most buyers head to the biggest exchanges because they offer the easiest way to buy cryptocurrency.

This surge of buyers causes an increase in BTC prices on large exchanges like Exchange A, while Exchange B sees less trading volume and its price is slower to react to the change in the market. BTC reaches US$9,240 on Exchange A, but only rises to US$9,070 on Exchange B, which is where arbitrage comes in. You could do the following:

  1. Buy BTC on Exchange B at US$9,070.
  2. Transfer your BTC to Exchange A.
  3. Sell your BTC on Exchange A for US$9,240, securing a profit of US$140 per BTC.

* This is a fictional, but realistic, example.

How does cryptocurrency arbitrage work?

Cryptocurrency arbitrage occurs when the same asset trades at different prices on different markets. These price differences can arise because exchanges have different levels of liquidity, trading volume, market access and local demand.

Cryptocurrency arbitrage

Most price differences are small and often disappear quickly as market makers and arbitrage traders act on them. However, larger differences can occasionally emerge during periods of market volatility, regional demand imbalances or market disruptions.

The most famous example of crypto exchange pricing differences was a phenomenon known as the “kimchi premium,” which, in January 2018, saw the price of Bitcoin (BTC) in South Korea rise to more than 50% higher than global prices.

How to do cryptocurrency arbitrage

  1. Choose your exchanges. Select two or more reputable, high-liquidity exchanges, like Kraken or Binance, where the same cryptocurrencies are actively traded and supported for deposits, withdrawals and API access.
  2. Set up accounts and verification. Create accounts on each exchange and complete any required identity verification so you can deposit, withdraw and trade without restrictions.
  3. Fund your accounts. Deposit capital onto your chosen exchanges. This allows you to reduce transfer delays when you’re ready to make a trade.
  4. Select your tools. Use arbitrage tools or bots such as 3Commas or Arbitrage Scanner to monitor price differences and help identify trading opportunities across platforms.
  5. Connect via API. Link your exchanges to your chosen tool using API keys, allowing the system to view prices and execute trades automatically when conditions are met.
  6. Execute trades. Once your arbitrage tools and exchanges are connected, the system will scan for price discrepancies and execute buy/sell orders when a profitable gap appears, often within seconds.

Crypto arbitrage tools and software

There are plenty of arbitrage tools available in Canada now, including:

  • 3Commas: Popular trading automation platform with smart trading bots, portfolio tools and exchange integrations. Supports arbitrage-style strategies via connected exchanges.
  • Arbitrage Scanner: Real-time arbitrage detection tool that tracks price differences across multiple exchanges and DeFi markets.
  • Bitsgap: Offers automated arbitrage scanning and trading across major centralized exchanges, plus portfolio management tools.
  • Cryptohopper: Cloud-based trading bot system with strategy automation and marketplace signals. It supports arbitrage strategies via exchange integrations.
  • HaasOnline: One of the older and more advanced bot platforms, offering sophisticated arbitrage, market-making, and algorithmic trading tools.

Types of cryptocurrency arbitrage

There are multiple strategies arbitrage traders can use to make a profit, including the following:

Simple arbitrage

Also known as cross-exchange or spatial arbitrage, this is the most common strategy. It involves taking advantage of price differences for the same cryptocurrency across different exchanges by buying on the lower-priced platform and selling on the higher-priced one.

Cross-border arbitrage

Price differences can exist between exchanges in different regions due to demand, liquidity or regulatory factors. These gaps reflect variations in local market conditions and can persist for short periods before prices adjust across markets. Just like with simple arbitrage, you can take advantage of these differences by buying in the lower-priced market and selling in the higher-priced one.

Futures vs spot arbitrage

This strategy takes advantage of price differences between the spot market (immediate purchase price) and futures contracts (agreements to buy/sell at a later date). You can profit when the gap between the two is larger than expected.

Triangular arbitrage

Triangular arbitrage involves taking advantage of price differences between three currencies within the same exchange. For example, buy BTC in USD, sell it to make EUR and then exchange those EUR back to USD. If the exchange rates between these pairs are slightly misaligned, the final amount of BTC (or whatever cryptocurrency you buy) can be higher than what you started with.

DeFi arbitrage

This occurs within decentralized finance platforms, where price differences between liquidity pools or decentralized exchanges (DEXs) are exploited using smart contracts. These opportunities typically arise due to differences in liquidity or trading activity across platforms.

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Finder Score for crypto exchanges

To make comparing even easier we came up with the Finder Score. Supported coins, account fees and features across 28 cryptocurrency trading platforms are all weighted and scaled to produce a score out of 10. The higher the score, the better the exchange—simple.

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The potential benefits of arbitrage

Why would you consider cryptocurrency arbitrage? There are several reasons:

  • Fast way to (potentially) turn a profit. You can complete an arbitrage deal in as little time as it takes you to complete all of the relevant trades. This offers the potential to realize gains much faster than if you’re taking the traditional approach to buying and holding cryptocurrency before selling at a later date.
  • Market inefficiencies still exist. While the crypto market is more mature than in its early years, it remains less synchronized than traditional financial markets. Differences in pricing can still appear due to variations in infrastructure, liquidity and trading activity across platforms.
  • Market fragmentation across exchanges. Crypto still trades across many exchanges globally, though activity is now concentrated on a smaller number of high-liquidity platforms. Differences in pricing can still occur because liquidity, trading volume and order flow vary.
  • Cryptocurrencies are volatile. Choose Bitcoin or any other top-traded cryptocurrency and take a look at a graph charting its price for the past decade. This is a great way to understand just how volatile crypto prices can be—and wherever there’s volatility, there’s the potential for price differences between exchanges.
  • Automated tools. Today, arbitrage strategies are commonly supported by automated tools that can scan multiple markets and execute trades quickly. This makes it easier to act on temporary price differences.
  • Smoother returns. Crypto arbitrage can generate frequent small profits without relying on big price moves, which may lead to a more stable equity curve than directional trading. It is often market-neutral, although fees, execution risk and competition can still affect results.

The risks of cryptocurrency arbitrage

Cryptocurrency arbitrage may sound simple in theory, but in practice there are several barriers and risks you’ll need to be willing to accept in order to trade profitably:

  • Storing coins on exchanges. To place arbitrage trades, you’ll need to store coins on crypto exchanges so they’re ready for use whenever you need them. There have been plenty of examples of exchanges getting hacked, not to mention some stealing money from customers, so you’ll need to be aware of this risk before getting started.
  • Exchange fees. Most crypto exchanges charge fees on trades, while deposit and/or withdrawal fees sometimes also apply. You’ll need to factor these fees into your calculations when determining the profitability of a trade.
  • Large trades often required. Once you take into account processing delays and all the fees that apply, profits from successful arbitrage trades may be small. As a result, you’ll often need to buy and sell large volumes of crypto in order to magnify your returns, which, in turn, creates a bigger risk.
  • Withdrawal limits. If you’re looking to place large trades, be aware that many exchanges limit the amount you can withdraw from your wallet per day, so it may not be possible to withdraw the coins you want to execute a profitable arbitrage deal.
  • Network and withdrawal delays. Transfers between exchanges or across blockchains can take time, during which price differences may close.
  • Competition risk. Arbitrage opportunities are often short-lived and heavily competed for, especially by automated trading systems that can react much faster than manual execution.

Cryptocurrency charts

Things to consider before attempting cryptocurrency arbitrage

Cryptocurrencies are complicated and highly speculative and, as we’ve outlined above, arbitrage comes with its own risks attached. You’ll need to make sure you’re fully aware of those risks before you even attempt to execute an arbitrage deal.

If you’ve thoroughly researched how arbitrage works and you understand the risks involved, keep the following tips in mind before getting started:

  • Look for new listings. Keep track of crypto forums and news sites for announcements of a new coin being added to an exchange. If a coin has only been recently added to an exchange and there is only limited demand for the coin on that site, you may be able to find a larger price differential.
  • Be mindful of transfer methods. Speed and cost matter when moving funds between exchanges. Many participants use stablecoins or low-cost networks to reduce delays and avoid price movement during transfers.
  • Have a plan. There are several key questions and factors you’ll need to consider before starting. For example, how much money should you put in? What percentage difference between prices will represent a sufficiently profitable opportunity? Will you keep a balance of coins on multiple exchanges or transfer your funds around as needed, thereby increasing delays?
  • Use reliable, liquid exchanges. Focus on platforms with strong liquidity and consistent withdrawal performance, as delays or restrictions can directly impact execution.
  • Monitor market conditions. There is a greater chance of price differences during periods of market volatility, so monitor crypto markets for any news and developments that could cause rapid price changes.
  • Hedge. To protect against sudden market moves that aren’t in your favour, it’s worth reading up on hedging strategies and how to use them.
  • Diversify. Only channelling your money into one exchange, or one particular cryptocurrency, is risky. Spreading your money around can help to minimize risk.
  • Limit your exposure. Never arbitrage an amount that is more than you can afford to lose. With so many potential risks that could lead to a loss, it’s always a good idea to play it safe.
  • Account for fees and slippage. Trading costs, network fees and price movement during execution can significantly reduce or eliminate potential profits.
  • Test different tools and platforms. Not all arbitrage platforms and exchanges perform the same way, so it can be useful to compare different options in terms of speed, supported exchanges, fees and reliability. Consider running small tests with different platforms before committing significant capital to identify which setup works best.

Bottom line

Cryptocurrency arbitrage can offer small, frequent profit opportunities by exploiting short-term price differences across markets. However, these gaps are typically narrow, highly competitive and quickly corrected. After accounting for trading fees, transfer delays and execution risks, profitability can be harder to achieve than you think. Cryptocurrency arbitrage may suit experienced traders with access to multiple exchanges and automated tools, but it’s not a low-risk or guaranteed-return strategy.

Frequently asked questions about cryptocurrency arbitrage

Sources

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Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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Tim Falk is a freelance writer for Finder. Over the course of his 20-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio

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Rebecca Low is a writer for Finder. She has contributed to a range of digital publications, including income.ca, Indeed, and Expatden, writing on topics like personal finance, career development, and travel. See full bio

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