Demystifying cryptocurrency arbitrage: Understanding advanced algorithms

Basics of Cryptocurrency Arbitrage

Cryptocurrency arbitrage is based on the same principle as all other types of arbitrage in various assets – the difference between the purchase price and the selling price. Unlike the forex or stock markets, which have existed for more than a century, the cryptocurrency market is still relatively new. Over time, these markets have been fully mastered, and unified centers for updating quotes have been created, making arbitrage on these markets a more labor-intensive process today. 

The situation with the cryptocurrency market is different: it is only in its second decade, there is no legal framework for cryptocurrencies, although some organizations are trying to create one (IMF). As a result, there is no unified center responsible for quotes in the crypto market. Consequently, exchanges orient themselves based on supply and demand for each asset, as well as the average market price level. However, this is not enough, leading to arbitrage situations that ArbitrageScanner identifies – with its help, finding a profitable combination is straightforward. 

Currently, there are two main types of cryptocurrency arbitrage: inter-exchange and international. The first option is more accessible to anyone, with a low entry barrier: you can start with as little as $10. Obviously, the profit will be small, but it's only a matter of time. 

As for international arbitrage, it is not suitable for everyone. Here's what you need to start engaging in international cryptocurrency arbitrage:

• A substantial capital that can cover all operational costs;

• One or more people in different countries who will receive the incoming cryptocurrency and withdraw it in fiat to local accounts. They should also have registered legal entities; otherwise, the local regulator will quickly block the funds; 

• Either do it yourself or hire people who will search for combinations, for example, in the format: buying crypto, withdrawing in fiat in another country, buying with local currency, and withdrawing in Russia for rubles. 

International arbitrage has many pitfalls that can lead to significant losses or even loss of capital if you hire unverified individuals. The earnings from one cycle of combinations are often the same as in inter-exchange arbitrage, where everything is under your control. 

Algorithmic Trading

Algorithmic trading is the process of automated buying and selling of assets on exchanges, carried out using specialized software. These programs operate based on pre-established rules and algorithms that allow transactions to be executed much faster and more efficiently than humans can. Algorithms can analyze vast amounts of data, track price fluctuations, and make buy or sell decisions in fractions of a second, contributing to increased profits and reduced risk of losses.

Algorithmic trading is widely used in financial markets, including crypto exchanges. It allows traders to use complex mathematical models to predict price movements and automate the trading process. This approach significantly improves the response to changing market conditions, minimizing the influence of human emotions and errors on decision-making.

Cryptocurrency Arbitrage Strategies

The advantage of inter-exchange cryptocurrency arbitrage is that there are more strategies to choose from, allowing everyone to find a suitable one:

• Spot + Spot

• Spot + Perp (futures)

• Spot + Dex Perp (futures)

• Spot + Dex

• Perp (futures) + Spot

• Perp (futures) + Perp (futures)

• Perp (futures) + Dex Perp (futures)

• Perp (futures) + Dex

• Dex Perp (futures) + Spot

• Dex Perp (futures) + Perp (futures)

• Dex Perp (futures) + Dex perp (futures)

• Dex Perp (futures) + Dex

• Dex + Spot + Dex Perp (futures)

• Dex + Spot

• Dex + Perp (futures)

• Dex + Dex

Types of Algorithmic Trading Strategies

Here, three main strategies are highlighted:

• VWAP Indicator is used in trading strategies to ensure that orders are executed as close as possible to the volume-weighted average price. In this strategy, the order is split into several smaller parts and executed step-by-step over a specified period to match the volume-weighted average price;

• TWAP is a strategy similar to VWAP, but its primary focus is on the uniform execution of trades over a specific time rather than volume. This method allows orders to be placed gradually, reducing the impact of large trades on market prices;

• POV Strategy is based on executing trades according to a predetermined percentage of market volume. For example, the algorithm may conduct operations that constitute 10% of the total trading volume over a specific period. This approach allows the speed of order execution to be regulated based on market activity, helping to minimize the impact on prices.

Future Trends in Cryptocurrency Arbitrage Algorithms

A recent trend in cryptocurrency arbitrage is the emergence of DEX and DEX Futures. Until recently, futures were a privilege of centralized exchanges. Moreover, decentralized exchanges could not attract a large number of traders on a permanent basis due to the lack of perpetual futures and high trading commissions: if 1% of a trade per day is normal, conducting dozens or hundreds of such trades per day significantly reduces profits. 

Everything changed with the development of L2 blockchains, sidechains, parachains, and other hybrid transaction processing models. Thanks to this, decentralized exchanges offering perpetual futures and low (or even zero) commissions began to appear. 

Additionally, cryptocurrency arbitrage through decentralized exchanges brings several non-obvious advantages: 

• No need for identity verification to trade; just connect your wallet;

• Your funds cannot be blocked, as you have sole access to your wallet;

• You can catch much higher spreads than on centralized exchanges due to somewhat unstable liquidity, which creates arbitrage situations. 

Finding DEX + Futures combinations is easy: you can use the futures scanner from ArbitrageScanner, select suitable decentralized exchanges, and get profitable combinations. We recommend using this tool to achieve super profits from cryptocurrency arbitrage! 

Conclusion

Opportunities for cryptocurrency arbitrage exist and will likely continue in the near future. Therefore, don't waste time when there are such accessible ways to earn. ArbitrageScanner will provide all the necessary tools for cryptocurrency arbitrage, ensuring that finding combinations is high-quality, fast, and productive!