It feels like there are very few ways to make money in crypto at the moment. Despite Bitcoin’s recent bounce, there are still plenty of signs that we might be facing a multi-year bear market.
Of course, this is nothing to worry about for long term HODLERs. They can keep their crypto in cold storage and ride out this period, ready for the bull market to resume.
However, many people are looking for ways to profit from crypto during the bear market. Something that will provide them a source of income. The most obvious way to do this is by trading. This involves studying charts and trying to time the moves of a volatile market. It also involves a lot of skill and a lot of risk.
However, there is a way to earn a passive income through the bear market with much less risk. Today we’ll be talking about arbitrage.
What Is Arbitrage?
As we are sure you know, crypto assets are available on many exchanges. Different exchanges each have their own order book. Whether it be Coinbase, Kraken, Binance, Huobi or any other exchange, the trading done on each platform occurs independently.
This means that very often the same asset is available for different prices on different exchanges. This might happen for a number of reasons.
For example, different regions have different laws that determine how you can invest in crypto. If access to trading is restricted it can cause an imbalance between supply and demand on local exchanges leading to differential with the rest of the market. Also, crypto is a volatile space.
The sudden swings of the market are unpredictable and, on high volatility days, it is common for different exchanges to move in slightly different directions.
Regardless of what causes it, a differential in price is a great opportunity for an arbitrage trader. An arbitrage trader will buy an asset on an exchange where it’s price is low and immediately sell it on an exchange where price is higher. If done correctly this allows them to make a risk free profit from the trade.
The Challenges
As you can imagine, arbitrage opportunities are highly sought after. Because of this, they are not available for a very long time. To take advantage of an arbitrage you will most likely need a software application that can track different cryptocurrency exchanges in real time. The app will notify you and even make automatic orders when opportunities become available.
In 2017, there was a moment, during a day of very high volatility, that Bitcoin was available on Kraken for $17,212 but only $16,979 on Bitstamp. Although this presented a massive arbitrage opportunity it is rare that there is such a differential in the price of Bitcoin. The volume of trading is just too high meaning that the market behaves synchronously on different exchanges.
For this reason, it is usually better to target small cap coins as they present better arbitrage. However, this itself presents a challenge. Low cap coins mean low liquidity which means, often, you can only make a limited amount on each trade.
Don’t Forget The Risks
Although arbitrage trading is a low risk strategy, it is not totally risk-free. The most pressing risk is not offloading your coins fast enough to take advantage of the opportunity. If you buy coins on one exchange with the intention of selling them for more on another, but the price on the second exchange goes down while you hold the coins, you could face a loss.
This risk can be countered by simultaneously longing and shorting the asset on separate exchanges. You can then close each trade when the price converges.
Exchanges often have trading fees. These fees present a risk because, unless the arbitrage is significant enough, the fees can also put you at a loss.
Obviously, there is no strategy for making money that does not come with its own risks. However if you’re looking to make money in crypto, during a bear market, there are few ways as low risk as arbitrage trading.
Please note this is an opinion piece, in no way shape or form should this article be considered soliciting financial advice.
