Crypto arbitrage is when you buy an asset at one place and then sell it at another where it costs more. This is a relatively low-risk way to profit from crypto, and that’s why it’s preferred by many.
With the inception of the blockchain-based loan industry, crypto lending arbitrage opportunity has also emerged. This one refers to taking out a cryptocurrency loan at one service and then lending it at another one at a higher interest rate.
In this article, we will answer the following questions:
- How to make money from buying and selling the same asset on different platforms? How’s that even possible?
- How to turn a profit from the interest difference between two cryptocurrency lending platforms?
What is crypto arbitrage about?
At different trading platforms, digital currencies have different prices. Here’s why that happens: crypto exchanges match buyers and sellers, and the balance of their activity results in an assets’ price. If the buyers are strong, the supply goes down, the asset becomes more scarce, so the price goes up. If sellers are more active, it’s hard to persuade anyone to buy the asset at a high price — so it drops.
On different services, the activity of buyers and sellers highly correlates since the crypto market is a whole. However, there are still some differences that mainly result from the trading volume: the lower it is at a certain platform, the slower the prices move. Bigger exchanges offer more liquidity and faster demand/supply shifts, and thus have more flexible namely better prices. Well, this is where price discrepancies come from.
Arbitrage was conceived long before crypto — it has been around since stock, bond, and foreign markets emerged. Back then, such factors as the geographical location could strongly affect the price at an exchange. And since those times, here’s what we’ve learned: in arbitrage, you have to be fast. Move your assets from one exchange to another before the price changes — because they can do so very quickly. Constantly analyze the market, keep looking at the numbers to grasp the best deal. If you manage that, your Bitcoin arbitrage can become a very lucrative and safe profit strategy.
Let’s take a look at the strategies of crypto arbitrage. Here’s the easiest one: simply find an asset’s price discrepancy at two different trading platforms, buy the currency at a lower price, and then instantly sell it for the higher one. That’s it.
Here’s a more advanced, yet easily comprehensible strategy that is called Triangular arbitrage. This scheme implies studying the exchange rates between three different cryptocurrencies to find price discrepancies you can profit from.
Let’s say, you buy 38.47 ETH worth 1 Bitcoin, then sell it for 740.5 BNB, and then get back from it to Bitcoin — but now, you have 1.02 BTC in your stash. Pretty cool for one simple exchange, isn’t it?
Well, in reality, there are three important things to consider to take such high profits:
- You need to do extensive market research to find a good deal. This takes time.
- High profits from arbitrage come when you use large capital. Moving small sums around would only result in losing from transaction costs.
- Oh yes, the transaction costs! Don’t forget to take them in mind while calculating your potential profit.
OK, it sounds like a lot of time and work is needed to constantly monitor the market, etc. Is there any long-term arbitrage opportunity that doesn’t imply day-to-day activity? The answer is yes.
Cryptocurrency lending arbitrage
Crypto lending arbitrage is about finding a platform where you can borrow an asset at a lower interest rate and then another platform where you can lend it at a higher rate.
Say, you borrow 10,000 USDT on CoinRabbit at a 14% Annual Percentage Rate (APR). This means you’ll have to pay us back 11,400 USDT when you want to repay your loan. But before doing so, you lend this Tether somewhere else at a higher rate. There, you will gain an extra profit — so, when you come back to us, you already have a difference that you can take as your profit.
Here, the same pattern applies — the more you invest, the more you get at the same percent. But while crypto arbitrage trading and crypto loan arbitrage seem to be not as risky as traditional trading, please stick to the golden investment rule — do not invest more you can afford to lose!
Why crypto lending arbitrage?
- Less time-consuming. Compared to the “regular” crypto arbitrage, here, you only have to do your research once. After you invest your money, you can simply wait and just check from time to time how things go.
- Governance tokens as a bonus. If you lend in DeFi, you can earn some extra governance coins with which the services reward their customers. You can use them to vote on the project updates or simply sell and get more profits.
The major part of lending arbitrage happens in the DeFi segment — their borrowing&lending services are mutually beneficial to the platforms and the users. Many large and trusted projects have been established there, however, it’s always good to remember the potential risks that decentralized borrowing and lending imply. Centralized finance is always an alternative.
What’s the risk arbitrage in lending implies?
- Potential insecurities of DeFi protocols. Buggy smart contracts are often the targets for hackers — millions of dollars have yet been stolen in DeFi. Read more about it here.
- Risk of fraud. DeFi is a rapidly developing niche no stranger to scams. Before investing, examine the reputation of projects and avoid deals that seem too good to be true.
- Price fluctuations eating your collateral. If the price of your collateral drops by more than 50% according to our loan-to-value ratio, we will warn you three times before liquidating it.
Crypto trading arbitrage and Bitcoin lending arbitrage are good opportunities to earn from crypto. The former offers quick dynamic and faster profits, while the latter takes much less time. When realizing your arbitrage strategies, please remember what risks they imply.
Reinvest the sum you borrow here in the service with an interest rate higher by 2-5% — and profit! Use the calculator to see how much you can borrow now.