Arbitrage in the Cryptocurrency Market

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@ kennymuli Kenny Li Investment Analyst @ SenseTime. Founder of Worthyt. MIT Sloan 2020.

Disclaimer: this is an educational piece to help readers better understand the various arbitrage opportunities available in the cryptocurrency market. This is not investment advice or a suggestion to do it — anything you do is at your own risk! Crypto arbitrage can be a very high-risk activity.

In a nutshell, arbitrage (when it comes to trading) is a strategy to take advantage of differences in prices across markets to make profit. We can take roses as a simple example — for special events such as Valentine’s Day, usually emotionless people like myself forget to purchase roses for others. By the time we’re at the doorstep, we realize that we don’t have roses — luckily, there’s someone standing on the corner ready to fully take advantage of our desperation.

A dozen roses for $50. Ouch.

But apart from realizing to plan ahead next time, the bigger lesson here is how the rose seller took advantage of a situation to profit. He or she probably just went to the supermarket a week or month prior to order tons of roses very cheap, to be delivered on the night before Valentine’s Day. He saw an opportunity to buy roses cheap somewhere and sell somewhere else for more expensive, which landed him profit. This is arbitrage.

Except in the trading world, there is no waiting — arbitrage opportunities come and go in the blink of an eye. Sometimes selling and buying must even occur simultaneously.

The Prominence of Arbitrage in Cryptocurrency Markets

When it comes to trading, arbitrage is not an idea unique to cryptocurrency. Tons of exchanges (CoinMarketCap lists a total of 194 exchanges at the time of writing) have emerged globally faster than pimples on your face as a teen. As a result, the market is ripe for different arbitrage strategies to take advantage of this chaos. More commonly, people recognize arbitrage opportunities with:

Pricing — different prices are listed for different exchanges. For example, a coin could be $5 when buying with USD on Exchange A, or $6 when buying with BTC on Exchange A, or $4 when buying with USD on Exchange B. CoinLib has a really nice price-explorer specifically designed for arbitrage called the Best Price Explorer. It lists all of the available exchanges for any specific market, ranked from most expensive to least expensive. From there, you can decide whether or not there is any profit in making money off the difference in prices — keep in mind that for price arbitrage you have to consider 1) the fees for trading a coin, 2) the fees for withdrawing/depositing a coin, and 3) the potential blockchain network fees. If there is still profit after all that’s said and done, you must also consider the time it takes to move money from one exchange to another, as the speed will directly affect the risk because arbitrage is dependent on a window of opportunity, it is not a permanent difference. Geography — there’s a term out there in the cryptocurrency world that’s as racist as it sounds: The Kimchi Premium. It refers to the inflated prices of cryptocurrency when you try to buy inside of Korea. Despite its xenophobic undertone, though, the reality is that cryptocurrency prices in different countries can noticeably vary due to supply and demand. From a regulatory standpoint, this is a harder abritrage to pull off due to the unique laws of each country’s financial governance. Today, the premium pricing exists in many countries outside of Korea, including places like India. If you can figure out how to comply with local regulation of both countries (e.g., one thing to consider is the limitation on withdraw amounts internationally), then geographical arbitrage can be a platform to take advantage of.

Lean in, I’m going to tell you how to be arbitrage AF.

But there is a third major arbitrage opportunity that flies under the radar for many new investors: the Listing Arbitrage. When coins get listed on large exchanges, they tend to have a window of opportunity for lucrative price arbitrage due to the buy demand for users on the new exchange. One of the exchanges where this effect is the most prominent is on Binance.

The “Binance Listing Effect”

Coins listed on Binance have historically seen price pumps.

Binance is one of the largest cryptocurrency exchanges in the world right now and is especially great for purchasing altcoins. It is listed as Number 1 on CoinMarketCap for trade volume (the total dollar amount of buys and sells) over a 24-hour period. Currently, it has 247 active markets where users can trade everything from Aeternity to ZCoin using currencies like Bitcoin, Ethereum, and Binance Coin.

Getting Listed on Binance Is No Easy Task

For a coin, being listed on Binance is like getting accepted to an Ivy League university. The process begins through a Google Form that requires a signature for a Non-Disclosure Agreement (NDA — fancy legal lingo for a contract that makes you agree to keeping your mouth shut about everything) before continuing any further. The form must be filled out by the CEO/Founder/Co-founder of the cryptocurrency.

The entire process is entirely anonymous and behind-closed-doors on Binance’s side. Binance will not offer representatives that the cryptocurrency team can communicate with in an effort to remain unbiased and remove any attempts at suspicious activity such as bribery. While there is no formal rejection for any application, Binance’s auditing team may choose to delay your acceptance indefinitely.

According to Changpeng Zhao, the CEO of Binance, the exchange looks for “good coins” to add to its portfolio. While he does not define good with a list of qualities, he does emphasize that Binance looks for coins that are not just hype and price-focused. He also states that they do not like seeing a cryptocurrency using the Binance brand to promote its own brand. But the note most relevant to exchange arbitrage is:

We do not allow teams disclosing they will get listed on Binance until their coin starts trading. If this info leaks out, we will put the listing on hold, possibly indefinitely.

This is one of the factors compounding the risk of Exchange Listings arbitrage. While a cryptocurrency team is allowed to publicize the fact it has applied to Binance listings and has an application in progress for review, it cannot state whether or not the application has been approved. This is likely due to the fact that even the CEO is aware of Binance’s affect on a coin’s price after its initial listing:

Most projects get a few times multiple in value after they list on Binance.

For more information about tips to get listed on Binance, check out this article written by the CEO of Binance: https://www.linkedin.com/pulse/binance-listing-tips-changpeng-zhao/

Case Study: Nano (NANO) Formerly RaiBlocks (XRB)

A recent example of the Binance Listing Effect occurred with Nano (formerly Raiblocks).Prior to its listing on Binance, Nano was only available on two major exchanges: BitGrail and Mercatox (it was later introduced into HitBTC and with the release of Nanex, an exchange built to trade Nano similar to BitGrail and Mercatox). Both exchanges have little reputation, and drove the majority of Nano volume when it was first listed on exchanges.

On February 2, 2018, Binance listed NANO on its exchange. A quick view on CoinMarketCap showed that NANO’s price wasn’t affected. But this was only a limited view of the story.

Coinmarketcap price report of Nano on February 2nd shows a high of 210k Satoshis

Meanwhile, on Binance, the listing occurred around 19:00 GMT on February 2nd, 2018. Within minutes of the listing, the price skyrocketed to a record high price for NANO within the exchange at 0.00294290, or 294,290 Satoshis. See the graph below (source: Trading View) for how the charts looked on Binance:

Binance listed a high of 294k Satoshis for the highest price that NANO sold for

The highest price for NANO on Binance was 40% higher than what was listed on CoinMarketCap.

This was a perfect arbitrage opportunity. Many investors (myself included) saw the potential for NANO to be listed on Binance; in fact, one of my primary reasons for buying NANO was its potential listing on Binance. As soon as the markets opened, the buyers on Binance came flooding in. As a seller, you had to send your NANO holdings from the exchange you purchased on, over to Binance, and then from there you could execute the sell and gain a quick profit through arbitrage.

Things to Consider

Binance arbitrage can be lucrative if executed properly. That being said, it has a lot of risk, and should not be attempted unless you are fully aware of and accept the possibility of getting burned.

It largely comes down to speculation, because Binance will not announce plans to list any coin prior to the day of its listing, and it specifically emphasizes to the coin teams to keep silent under NDA. If you do choose to consider Binance arbitrage, here are some tips to help get you started on the right direction:

Get Cryptoland. Right now, it’s only available for iOS (sorry, Android users!). If you can get it, get it. It has alerting systems to let you know immediately when a coin has been listed on an exchange. It’s also an amazing portfolio tracker all in one. Use Tweetdeck. Actually, I use Franz Messenger because it combines all my Slack, Discord, Telegram, WhatsApps, and Tweetdecks into one interface, which is nice. Anyway, once you get Tweetdeck, set alerts for search terms such as: #binance, binance, binance listing, listing on binance, listed binance (you can make one section for each term). There, you can see what the general sentiment of the Twitter community is in terms of what coins people think may be listed on Binance, which coins have applied to Binance for listing, etc. Learn about the Coins. As the CEO mentioned, Binance will list good coins, not pump-and-dump schemes. After you find a list of frequently talked-about coins on Twitter, check them out and see if they provide true value to the cryptocurrency world or the world in general. Things to consider include: 1) What is the value proposition, and will it make a difference? 2) Who are their competitors, and how do they do it better? 3) What is their roadmap, and do they have a proven track record of execution and timely delivery? 4) Who are the team members and advisors— do they have the experience and connections to make it happen? Subscribe to Subreddits and Bitcoin Talk Forums. Once you learn about the teams, also check out the communities and see what people are saying. Keep in mind that communities tend to have group-think bias, so don’t focus on the posts about how Coin XYZ will moon, or how it’s the next Bitcoin; instead, read the posts on community reviews and deep-dive analysis of the currency and its potential value on the marketplace. Perspective from community members will help you understand if the coin’s message is truly being communicated properly to the world, which is very important for the ultimate success of a cryptocurrency project.

In Conclusion

Now you understand the fundamental methodology behind Binance arbitrage. Using RaiBlocks/NANO as an example of a recent opportunity, the proof exists that the arbitrage can result in decent profit. Taking advantage of this window of opportunity, though, involves a high amount of risk due to the speculative aspects of coin listings. If you decide to try this out for yourself at your own risk, do your due diligence using my list in Things to Consider as guidance (of course, this is not an inclusive list). If you have done this before and think I’m missing out on some valuable information to pass along to readers, feel free to comment it in the comments below or DM me on Twitter.

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