Cryptocurrency arbitrage on cryptocurrency futures exchanges Friday April 22nd, 2022 – Posted in: cryptoarbitrage software

The financial market has become accessible to everyone. If in the days of the formation of stock exchanges you had to be present at the exchange to make transactions, today it is enough to have a smartphone and conduct all exchange transactions using it. The road has been a long one. The introduction of computers and full automation of trading processes has greatly improved and simplified the life of traders. The times of needing several monitors to keep track of charts are over. Professional traders do very well without them. The more developed market is, the more simple it is in its analysis, the search for investment-attractive positions as well as the method of making deals.

Talking about the technological process as well as the availability of exchanges, many people think of the cryptocurrency market at the same time. Although it’s still a young market, there are additionally various kinds of companies and states joining the coin market, which gives a new impetus to the development of this area.

The crypto industry is developing all over the world. More and more organizations are accepting cryptocurrency as an additional means of payment. More and more companies are adopting blockchain technology in their businesses. And more and more people are accumulating their savings, not in the usual assets (funds, currencies, bonds), but crypto. The current state of affairs cannot be called a new fashionable trend or some kind of know-how. It is already a fully formed and conscious market that is developing every day. Of course, the peculiarity of the market implies payment by means of blockchain technology, which uses cryptocurrency. Blockchain’s interconnection with the real market (buying goods and services for crypto assets) pushes cryptocurrency and makes it one of the most profitable vehicles for investment.

Cryptocurrency is a digital asset that is accounted for by decentralized payment systems. The peculiarity of this asset lies directly in its accounting. As it is a payment system, where there is no single supervisory authority, all transactions take place in complete anonymity and automatic mode. In its essence, cryptocurrency is the remuneration of the participant of the blockchain network, which provides the performance of the system. Thus, the emergence of cryptocurrency in the world takes place through so-called “mining”. When each participant of the network calculates a certain algorithm, after solving which the block is considered closed, the participant who closed it receives the cryptocurrency. Of course, it is not the person himself who takes part in this, but his “powers”: the computer or targeted “farms” for mining cryptocurrency. And already with this payment, the network participant can dispose of as he likes: to accumulate funds on his cryptocurrency purse or to make purchases of goods and services.

It turns out a simple pattern: the more companies or firms accept payment for their goods in cryptocurrency, the greater the demand for it, and the greater the demand, the greater the number of miners of the coin.

Another key driver of cryptocurrency value growth in recent years has been interesting large investment companies. For example, the investment company MicroStrategy already owns more than $2.5 billion worth of Bitcoin. And this is far from the latest example of a large company. The innovative Elon Musk also owns more than $1 billion worth of Bitcoin at Tesla.

Anyone who wants to get or buy cryptocurrency without additional mining labor turns to cryptocurrency exchanges.

Cryptocurrency Exchange:  A cryptocurrency exchange is a trading platform that provides trading operations for buying and selling digital assets (cryptocurrencies). Every participant can buy cryptocurrency, exchange various kinds of coins for other coins or make a purchase for fiat money (American dollar, euro, etc.) on a crypto-exchange. It is through cryptocurrency exchanges that all transactions are made and cryptocurrency capital is accumulated. If you want to buy a particular coin, in addition to a cryptocurrency wallet, you will need to have an account on the exchange to make transactions.

The more institutional companies and big players enter this market, the stronger the index and asset value will have. It is already a proven fact for businesses: if you do not accept cryptocurrency payments – you lose customers and lose out to competitors.

That’s why more and more eyes are focused on cryptocurrency and more and more beginning traders and investors start their acquaintance with exchanges in this market.

It should be understood that the cryptocurrency market is young. This means that it goes through all the stages of development, just like other exchanges. This gives traders a significant advantage in understanding and predicting market patterns. After all, the vast majority of all trading approaches refer to history. Market analysis is a regular search for patterns when the same scenario in the market leads to the same result. This is why classic tools that have worked perfectly for over a hundred years on the stock market are still successful today on cryptocurrencies.

When it comes to speculating on cryptocurrency, trading with the help of futures is becoming increasingly popular. That is an arbitrary financial asset for a cryptocurrency. A cryptocurrency futures guarantees that the buyer will pay for the asset at a certain time for the volume specified in the contract, as well as at a pre-agreed price. Thus, traders who use a futures contract trade on Bitcoin, for example, can use leverage to increase their profit potential.

Working techniques for investing and trading in the cryptocurrency market:

  • Trading on the following patterns: Pin Bar, Triangle;
  • Wave analysis;
  • Deviation from standard trading zones: the use of “envelopes” or Bollinger Bands;

Cryptocurrencies Arbitrage trading. 

Today, let’s take a closer look at the last type of working technique, namely arbitrage futures trading on different cryptocurrency exchanges.

Arbitrage is a trading technique that involves finding price deviations both in a particular group of digital assets and between specific cryptocurrencies on different crypto exchanges. Simply put, arbitrage is the constant search for price discrepancies. If you have encountered the cryptocurrency market before, you have most likely noticed how and by how much the quotes of the same asset can The price of Bitcoin varies depending on the region where it is traded or the marketplace. For example, when Bitcoin is $50500 on one exchange and $50400 on another, it allows the trader to speculate on it. There are a lot of options here: to buy a coin at one exchange (at $50400) and immediately sell it at another exchange (at $50500). Or open buy at $50400 on one exchange and sell at $50500 on the second cryptocurrency exchange and fix it at the moment when the value will coincide. Bottom line: two completely different approaches provide a trader with the same profit.

Thus, arbitrage in the cryptocurrency market is nothing more than making transactions on different exchanges to profit from exchange rate differences.

Types of cryptocurrencies arbitrage: 

  • Triangular cryptocurrencies arbitrage
  • External cryptocurrencies arbitrage
  • Latency cryptocurrencies

Crypto is a young market. Most importantly, it is not regulated. Most exchanges can directly dictate their terms of play, which means asset values can vary. Not globally. But a difference of even a few dollars on Bitcoin will give us a significant advantage and a great investment opportunity.

Triangular cryptocurrencies arbitrage 

One of the most popular ways of arbitrage, which is available to everyone, is the so-called triangular arbitrage. The logic of its work is fully rooted in its name. The idea is to open three positions for different assets. Since the market is primarily a human place, of course, short-term non-logical price gaps can occur in it. The cryptocurrency market is a living organism. The novelty of this sphere attracts the attention of more and more players who do not have enough experience to make effective trading decisions. Thus, such rifts will occur quite often.

The method consists of selling one cryptocurrency for fiat money and converting it into another cryptocurrency and buying the original asset for it again. That is, the method has a certain cycle that can work in either direction.

The main feature is the conversion to a fiat asset and the purchase of the cross rate. After all, the cross rate is formed not by dividing the value of one asset by another, but directly by the conversion of currency and the imbalance of supply and demand. This is why there can be a slight momentary divergence, which is an arbitrage situation and an opportunity for a trader.

To understand this logical sequence, let’s look at the principle of triangular arbitrage.

As you can see from the example, we have 3 assets. Each of these assets will convert and revert to the original asset. To understand which asset to use, the trader should carefully watch the cross rate and the difference between the cryptocurrency. The original asset is Ethereum. This asset is converted into a fiat asset – the U.S. dollar. Bitcoin is bought for it, which is subsequently converted to Ethereum. A beginner trader may not even grasp the essence of the earnings according to this principle. Consider in more detail with numbers.

BTC = $39500

ETH = $3000

Cross rate ETH/BTC = 0.07602

Attentive trader will notice that ETH/BTC rate is different from fair value ($3000 / $39500 = 0.07594). So if you convert ETH to BTC, the trader will receive 0.07602 Bitcoin. He sells them in dollars at 0.07602 and will receive $3002.79. The last transaction returns to the original capital in Ethereum, but the purchase will still be at the same price of $3000. The net profit for the instant is $2.79. Using cryptocurrency futures trading and using, for example, 10 leverage, the trader will be able to increase his potential profit from $2.79 to $27.9.


Triangular cryptocurrencies arbitrage

As you can already see from the example, it is necessary to convert the currency extremely quickly, because such investment moments do not occur very often. And, of course, an automatic approach to the realization of such goals (trading algorithmic robots that would search for such moments of divergence and make deals by themselves) would be a useful tool.

Hedge cryptocurrencies arbitrage 

This approach is extremely simple in its implementation and is a classic cryptocurrency futures trading technique. Its logic is to make transactions on the same financial asset but different crypto exchanges. For example, if the value of Bitcoin on one exchange is $39500 and on the second exchange $39600 – the difference between them will be the trader’s direct profit. Such situations arise at exchanges when there is great liquidity when there are huge buy or sell orders in the Depth of the Market, which moves the price considerably and outpaces other indicators. Undoubtedly this situation is seen at other exchanges and traders, who are engaged in arbitrage, do not the exception in this situation. After such spikes, everyone actively buys or sells the coin for which there was significant volume and which reversed prices. This eventually evens out prices on all platforms, so the trader does not have much time to conclude an outside arbitrage position.

To implement this approach, a trader should have multiple trading accounts on different crypto exchanges to be able to react quickly to the momentum. And it is best to have accounts on several exchanges and in several assets, so as not to incur additional conversion costs and not lose time. Also, don’t forget about the commissions of the exchanges. Arbitrage is a multi-dollar game and only futures improve this situation. And considering the volatility of the market, this difference may not be covered by buying and selling commissions.

From personal practice, we recommend trading exactly classic cryptocurrency instruments to exclude situations when a coin will not be liquid at all on one exchange and your buying or selling will lead to a strong impulse that will not give the expected profit or will pull the capital down at all. So look for outside arbitrage situations on the most popular cryptocurrencies: BTC, ETH, XRP, LTC, DASH, ADA, EOS, Binance Coin, NEM, NEO, Tron. This is not the whole list of the most liquid assets, but the idea is clear. Certainly, such situations will not arise so often, as on smaller coins, but the probability of profit on them is much more.

To make this approach work and be able to implement it, we need to have trading accounts on several crypto exchanges. These are where a trader looks at cryptocurrency price positions and finds the price discrepancies to make trading positions.

To understand what is best for arbitrage – it is necessary to understand the trading conditions of each platform. For this purpose, let’s highlight the best cryptocurrency exchanges that trade cryptocurrency futures and allow the best use of arbitrage situations.

Latency cryptocurrencies arbitrage.

The trading is conducted on one (slow) exchange and the signal source is a stream of quotes from a fast exchange. For example, if Bitcoin is $39500 on a slow exchange and $39600 on a fast one. The trader opens a Buy order on the slow exchange and applies a trailing stop. Typically, such trading is not conducted on the major cryptocurrencies, but on altcoins relative to the base currency. For example, the base currency may be USDT and traded Altcoin Avalanche (AVAX). Then, when the price of AVAX/USDT rises on a fast exchange, the program must open order on a slow exchange and apply a trailing stop to the order. Usually SELL orders are not traded, because in this case, there is a need to hold capital not only in the base currency (in our example is usdt) but also in altcoin, the price of which may fall sharply.

Cryptocurrencies Arbitrage Software (cryptocurrencies arbitrage bots)

Deep Analysis Arbitrage software (DAAS) allows you to trade not only on MT4®, MT5®, and FIX API but also on cryptocurrencies exchanges. The software includes connectors BINANCE, BITFINEX, BITMEX, BITTREX, BITSTAMP, CEX.IO, CRYPTOFACILITIES, CRYPTO.COM, DERIBIT, EXMO, GDAX, HITBTC, HUOBI, KRAKEN, OKEX.SPOT, POLONIEX, SFOX, TRADESATOSHI, YOBIT… by default and connectors to KuKoin, Binance, ByBit, Huobi, and OKX with the possibility to trade futures. DAAS has different built-in strategies for trading on various markets, including latency and hedge arbitrage strategies.  We can say that DAAS is the best cryptocurrencies arbitrage bot based on this information.

Top 5 crypto exchanges, where futures are traded:

KuCoin cryptocurrencies exchange

KuCoin exchange has existed for more than 5 years and has been successfully providing cryptocurrency trading opportunities since 2017. The exchange itself is not only engaged in providing services for buying/selling cryptocurrencies but also in searching for quality blockchain projects, in which it invests its funds. To date, the exchange accrues 5 million registered users in more than 100 countries. Nevertheless, the company also went through a difficult time in 2020, when the exchange was hacked and digital assets worth around $280 million were stolen from it by hackers. However, the exchange, in conjunction with other projects, was able to recover a significant portion of the lost funds to its users. This hack was the 4th largest in the history of cryptocurrency exchanges.

Regarding the commissions, there is a classical structure of levels, where the higher the level, the lower the level of commission, and in some conditions even the commission is negative (exchange pays market makers for trading operations volume). For example, the 1st level commission is 0.02% (Maker) and 0.06% (Taker), and for the last 12 levels -0.015% (Maker) and 0.03% (Taker). However, futures trading volume in the last 30 days must be 160000 BTC or more to reach level 12.

Binance cryptocurrencies exchange

Perhaps the most popular crypto exchange for private traders was founded in 2017. The exchange is not only engaged in providing services to buy and sell digital assets but also has a large architecture of its divisions. Thus, Binance has educational products, a research center, and, of course, investment and trading solutions. The company became one of the largest providers of exchange services with an average daily turnover of more than $4.3 billion.

The site gained more popularity after the introduction of its crypto coin, which is in wide demand among traders – Binance Coin. This allows the exchange to raise additional capital and entice new clients because the commissions on this coin have a lower value than on other assets.

The commission grid in the company has an individual format. Here the commissions are also tied to the balance of the coin from the cryptocurrency exchange – Binance Coin. This is another important addition to the benefits of commissions. In this way, the company encourages its customers and exchange users to buy its coins, which allows it to grow and develop faster than its competitors.

Bybit cryptocurrencies exchange

This crypto exchange was founded in 2018 and is one of the leaders in business growth. Today, the company has more than 1.6 million users of its platform. This platform is entirely focused on providing exchange services, which allows it to have competitive commissions. Moreover, Bybit has implemented an incentive program for market makers, allowing them to receive up to a 0.015% discount on the maker’s commission. The average commissions at the site do not have a wide-level gradation. The average commission rate for the maker is 0.01% and 0.06% for the taker.

Huobi Global cryptocurrencies exchange

One of the pioneers of the crypto industry. The company was founded back in 2013 and to this day has a turnover of over $1 billion. This crypto exchange is concentrated in the Asian region, which makes it great for arbitrage strategies.

In 2017, the authorities of the People’s Republic of China banned the Bitcoin exchange, which allowed the company to reformat its activities in China and function as a blockchain project with consulting services. The crypto exchange itself was reopened in Seoul and continued to provide exchange services to private traders.

The terms of trading on the exchange are not graded, but fixed volume: 0.02% (for maker) and 0.05% (for taker). Perhaps, this is an exception to the modern rules of crypto exchanges. But it is worth noting that the company implies a VIP program, which allows you to reduce the percentage of commission, depending on the trading volume. For this you need to write a request directly to the company itself.

OKX cryptocurrencies exchange

OKX is one of the leading exchanges for trading futures. In 2021 alone, the average daily volume of BTC futures was over $1.5 billion. In addition to futures trading, the company has implemented spot trading, as well as the opportunity to participate in the new trend of the crypto industry – DeFi. All services from the company are implemented on blockchain technology, and the user count has already exceeded 3 million users in more than 100 countries.

The working conditions on this exchange have a bright classic-tiered model. The average level of commission is from 0.015% (maker) and 0.030% (taker).

As a result, we suggest summarizing the obtained data in a single table for clarity of arbitrage conditions among cryptocurrency exchanges.

cryptocurrencies exchange comparison table

Understanding trading conditions and commissions is an important aspect of arbitrage trading, because often the commissions paid for opening trading positions can completely outweigh the profit potential.

Let’s take a simple example of arbitrage trading on different crypto exchanges. Let’s take the value of the most popular and liquid cryptocurrency in the world – Bitcoin.

The value according to different cryptocurrency exchanges:

  • KuCoin = $39525
  • Binance = $39545
  • Bybit = $39578
  • Huobi Global = $39521
  • OKX = $39583

As we can clearly see, the cost is different for absolutely all platforms. Each of them has its traders who set the price at a particular moment. The global direction is determined. But, how and where, and how many transactions to make? The answer has not yet been obtained.

The most important aspect of this exchange strategy is the accumulation of statistics. It answers this question. That is, a trader must know and understand which exchanges are statistically ahead of the others, and which ones are usually behind. It is also very useful to analyze the market depth and observe the increased volumes on one of the exchanges. Such situations lead to the sharp impulse of the coin, so the trend will continue on other exchanges, allowing the trader to react quickly and open additional positions.

Only professional traders, who are constantly in the market, can track these cumulative conditions and react to them in time. Despite the simplicity of the approach – it requires a solid foundation of understanding of trends and statistics. Therefore, most use ready-made trading algorithms, which greatly simplify the search for arbitrage deals. This is a kind of trading algorithm, implemented by a program code, which every second analyzes deviations from statistical data, as well as analyzes the volumes for making deals.

As a result.

Cryptocurrency trading has all the same aspects of stock trading as classical instruments. Here, of course, you need initial capital to profit, analysis of price behavior and statistical data, and most importantly, to have a working trading approach. This will ensure that the trader receives stable and long-lasting profits. The development of crypto exchanges allows the modern trader to use the best trading conditions on the market and speculate on it. The great abundance and choice of platforms for conducting their activities open up new opportunities in the use of classical methods of working in the financial market.

To summarize, exchange-traded futures arbitrage is a promising direction for both novice cryptocurrency traders and investors. The methodology of this approach is simple to master and requires only the maintenance of statistical data. The use of futures implies the use of leverage, which means that it will multiply the profit from a few tens of dollars of exchange rate differences and turn them into hundreds of dollars of profit on just one transaction.