Arbitrage Trading with Cryptocurrencies

We are living in an era where the world is experiencing some of the finest technological inventions of human history. Blockchain and cryptocurrencies is one of them and many of us will have a different perception and stories to tell about cryptocurrencies. Here in this blog I will share a slightly different story all-together. During the Q4 2017 time when the world was busy investing in all sort of cryptocurrencies me and some people like me who were late entrants of the crypto-market were doing a different sort of trading all-together. In financial world this trading is called Arbitrage. "Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient."

The Crypto Fall of 2018

Why Arbitrage ?

1. During the Q4 2017 everyday markets were seeing new highs and an expected fall was sure to happen thus any long term investment was too risky for late entrants.
2. When the market falls it falls at a faster rate due to panic among uninformed investor. And unlike a stock market where trading happen only in working hours, crypto markets can fall substantially while your are asleep.
3. Not too much money for long term investment. Arbitrage cycle used to take 24 to 48 hours thus, you can keep on rotating the same money with good 10 - 20 % profits.
4. Uncertainty of your government, who knows one fine day they can stop all crypto trading thus there is a good risk on your whole investment.
5. The Indian Hype factor : Any factor positive or negative is seen quadrupled in India due to sheer strength in numbers we have in any market.

The Process

1. Get an Indian credit/debit card from a bank which levies the lowest currency markup fees. Also open a back account with same bank. There are credit cards in market which offer currency markup fees as low as 1.75%. Apply GST on top of it, total currency markup fees would be almost equal to 2%.
2. Identify an non Indian Exchange which accepts credit/debit card. Using a card is important as you can fund your account instantaneously. The other way around is foreign remittances from any bank, but this process can take over a week. One such exchange which accepts cards is cex.io
3. Create accounts in Indian Exchanges like Zebpay, Koinex or any other exchange which gives good selling rates and faster money withdrawal. Preferably create accounts and get the KYC done in multiple of these exchanges and use any one based on the selling price of these exchanges on a per transaction basis. Also add the bank account of step 1 as the withdrawal option.
4. Fund your CEX account with Euros, as euro prices of any ETH is lower than USD prices in CEX. CEX will charge you 3.5% extra for using a card. In this step you will also spend 2 - 4% of your investment as markup fees based on your card. Many credit cards have good reward point system, so some part of it will be recovered as credit card points.
5. Buy ETH at CEX. CEX takes 0.25% as taker fees. All of CEX fees can be viewed here. Also note that when your transaction volume increases this fees will go down.
6. Send the purchased ETH to your Indian exchange address. Be very cautious in this step as any mistake in this step might end you losing all your ETH with no way to recover it. Transferring ETH is cheaper (fixed price of 0.01 ETH) and faster as compared to BTC. CEX will also give you an URL to track the progress of your transaction. An successful ETH transfer needs 30 confirmations on the Block (yes this is the Block behind the Block-Chain Technology). The transfer would take anything from 10 - 40 minutes based on the load, size of your block and number of miners.
7. Sell the ETH received in Indian Exchange and withdraw the money to your bank account. Exchanges in India like Koinex charges 0.15% as seller fees. Withdrawal would take 24 - 48 banking hours. Repay the credit card bill and enjoy the profit. The profit you make is also subject to Short Term Capital gain under Indian Taxation laws.

Maths Behind Arbitrage

The whole Arbitrage process takes benefit of price difference between Indian and foreign exchanges and is not always positive. In this section we will derive a simple formula to check the profitability. Usually this trend is visible when market is rising continuously for a long period thus creating higher level of interest in Indian markets.

The variables:

• Euro to INR conversion rate (E)
• Buying price per ETH in CEX in Euro (C)
• Selling price per ETH in Koinex in INR (K)

1. CEX charges 3.5% (plus fixed € 0.24 which we will ignore for calculations). Add currency markup fees on top of it, CEX taker fees, Koinex seller fees. So to buy ETH worth € 100 you need to spend € (100 * 1.035 * 1.02) + 0.25 + 0.15= € 105.97. Add a percent as buffer (to counter variation of INR-EUR rates of bank and ETH transfer price). So your final cost in INR is 107 * E
2. With € 100 you will get 100 / C ETH and when you sell this in Koinex you will get (100 * K) / C ?.
3. Profit per 100 Euro rotated = ? (100 * K) / C - 107 * E, with an risk of 40 minutes. So keep looking at the 3 variables E, C & K and take your risk.

Hope you enjoyed reading this blog and let us keep our fingers crossed to get an arbitrage situation again in near future. Please do share your crypto experience in comments section. There are other ways of Arbitrage too (within 2 currencies) and if you liked this article do some reading about inter coin arbitrage too.

ETH Transfer Tracking Page

ETH Transaction Visualiser

Disclaimer

The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author(s) – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold us to them in perpetuity.