The Beginner’s Guide to Crypto Arbitrage
Crypto Arbitrage and the Law
Since arbitrage seems like a simple way to turn a potential profit, it is fair to ask yourself: is arbitrage legal? In most countries around the world, crypto arbitrage trading is perfectly legal as it contributes to market efficiency.
Once a crypto arbitrage trader has completed their trade, they will inevitably bring additional traders to the market who are hoping to exploit the same price difference, which will eventually lead to the asset’s price to become more balanced across markets.
However, there are exceptions. You should read up on your local laws before participating in cryptocurrency or bitcoin arbitrage trading.
When in doubt, always consult a local lawyer or accountant before proceeding.
What is Crypto Arbitrage?
With Bitcoin’s high fees and often slow transfer times, bitcoin arbitrage traders have pivoted to more efficient options across cryptocurrency markets.
Kraken, for example, offers over 150 trading pairs, so, depending on the price of crypto assets across different markets, crypto arbitrage traders can exchange certain cryptocurrencies for others, or for more stable fiat currencies.
Through a single exchange like Kraken, you can participate in triangular arbitrage trading, which involves spotting the price differences between three cryptocurrencies on the exchange. For example, you can purchase XLM with BTC, sell XLM to ETH, and convert ETH back to BTC.
Arbitrage in Decentralized Finance
The rise of decentralized finance (DeFi) has brought about the creation of decentralized exchanges, such as Uniswap, Balancer and Curve, a type of exchange operated by a global network of computers rather than a central operator.
Most decentralized exchanges, rather than maintaining a central order book where buyers and sellers can place orders, use a collection of liquidity pools, where the crypto asset price is dependent on those who provide liquidity to the pools.
When used in conjunction with a crypto exchange like Kraken, traders are able to spot arbitrage opportunities in pools that experience a price slippage due to large transactions.
If it is your first foray into arbitrage trading, there are a few things you may need to take into consideration:
- Fees – It is important to consider fees in your trading equation, as they can negate any potential profits. For example, fees on Kraken range from 0.1% to 0.26%, so, you may want to avoid arbitrage differences lower than 0.30%.
- Volume – The higher the trading volume on a cryptocurrency, the higher the liquidity of that coin, which increases the probability of your trades being executed.
- Avoiding Slippage – Price slippage occurs when you get a different price than expected on an entry or exit from a trade. Thus, extensive research and perfect timing of the market becomes a crucial component of arbitrage trading.
Kraken's Crypto Guides
- What is Bitcoin? (BTC)
- What is Ethereum? (ETH)
- What is Litecoin? (LTC)
- What is Chainlink? (LINK)
- What is EOSIO? (EOS)
- What is Stellar? (XLM)
- What is Cardano? (ADA)
- What is Monero? (XMR)
- What is Tron? (TRX)
- What is Basic Attention Token? (BAT)
- What is Algorand? (ALGO)
- What is Waves? (WAVES)
- What is OmiseGo? (OMG)
- What is Gnosis? (GNO)
- What is Melon? (MLN)
- What is Nano? (NANO)
- What is Dogecoin? (DOGE)
- What is Tether? (USDT)
- What is Dai? (DAI)
- What is Tezos? (XTZ)
- What is Cosmos? (ATOM)
- What is Augur? (REP)
Start buying Cryptocurrencies
Useful Crypto Arbitrage Resources
Looking to learn what decentralized exchanges may help you find different cryptocurrency arbitrage opportunities? Head on over to Kraken’s Learn Center for a deeper dive into protocols like Kyber Network, Uniswap or SushiSwap.
If you are interested in learning more about the different cryptocurrencies, you can visit Kraken’s “Types of Cryptocurrencies” page.
Finally, if you want to spot additional opportunities, you can bookmark Kraken’s price page, which allows you to follow the state of the cryptocurrency market.