How Much Shall I Allocate Coins To Start Arbitrage?

If you are altcoin and BTC HODL investor. You can utilize the arbitrage strategy to increase your profit in the same time of gaining market beta exposure. What if I am beginner? How shall I start?

If I am a beginner in this crypto trading and would like to start with arbitrage. This is my scenario:

  1. I have less capital. I have only 0.50 BTC in total.
  2. I understand the spreads of LTCBTC pair in Exchange A and B is consistently exists
  3. I am bullish of LTC and think it will appreciate x number of times in the next 1 or 2 years.
  4. I would prefer to focus my capital in one single coinin this scenario.
  5. I will buy 0.25 BTC worth of LTC. i.e. 0.011. I will get 22 LTC.
  6. I will then place allocate 22 LTC and 0.25 BTC into Exchange A and B to start the arbitrage strategies.
  7. Whenever the 1.00% spreads exists(this is my preference) I will start to sell 1 LTC @ Exchange A and buy back at Exchange B each time.
  8. Each time I will capture 0.00011 BTC as profit in single
  9. Since I have 22 LTC, i may be able to perform 22 times to capture 0.00242 BTC with my capital until my LTC is used up in either Exchange A or B.
  10. I will then transfer LTC and BTC back to the position for arbitrage to start again. At this point, I expect my LTC position maintained at 22 but my BTC increased with the profit of 0.00242 BTC.
  11. By doing this few times a day, I can capture relatively decent profit in single day.

Since arbitrage activities involves coins transfer and BTC as funding vehicle. I would rather to stay focus in single pair rather than doing few pairs at the same time.

Note: This is my own preference scenario. I am not financial adviser that advise you to do so. I am sharing my experience gained after this few years of arbitrage strategies in crypto currency.

Arbitrage Strategies and Market Risk

I received a lot of questions on what is the risk of doing arbitrage and how much shall I start with if I want to run the arbitrage trading strategies.

First of all, depend on the trading pair you want to start with. You need capital. As example, if you want to run the arbitrages in altcoin with BTC as pair, you need to have the altcoins first. The arbitrage strategies is suitable to HODL investors or any beginner investor that believe the appreciation of the BTC and altcoins in longer time frame. So, choosing the coins is relatively important.

You may found a lot of market inefficiency among the crypto exchanges around the world. You may need to think more carefully how would you want to start. Let’s take a look at the following scenario: You think the spreads between XXX-BTC pairs has bigger spreads in Exchange A and B.

You decided to start with:

  1. Buy 1.0 BTC, then convert part of 0.5 BTC to XXX coins at price 0.005 You get 100 XXX coins.
  2. Then, you allocate the BTC and XXX coins to Exchange A and B
  3. You start arbitrage process continuously to buy and sell between Exchange A and B whenever spreads exists.

After few months, you may have captured attractive spreads as profit between those activities. But, have you thought about your capital depreciation if you are unlucky? Let’s assume the arbitrage profit within 3 months is 0.15 BTC in total. Your total BTC is as follow:

BTC = 0.50 (your capital) + 0.15 (profit from arbitrage)

XXX = 100 (maintained the same amount as capital)

But unfortunately the price of XXX goes down from 0.005 to 0.0025. It means your total asset when converting back XXX to BTC in total has lost 0.25 BTC in this case. Overall, you have 0.05 less than expected if you just hold BTC in general. That is the market risk you may have to be aware of.

On the other hand, if you are bullish on the XXX and what if you are right? XXX surge from 0.005 to 0.010 in 3 months. It means you are enjoying the capital appreciation at the same time gaining the profit from arbitrage trading.