How Arbitrageurs Are Making Money in the Crypto Crash

It can seem a bit morbid to talk about making money in a downturn that’s seen Bitcoin and Ethereum struggle to maintain prices above $20,000 and $1,000 respectively. As of Monday morning, the global cryptocurrency market cap was $904 billion—a huge fall from $3 trillion in November. 

The fact remains: There are strategies for making money during the crypto crash, and arbitrage traders are employing them. 

It’s usually apt to describe arbitrage as the simultaneous buying and selling of an asset to profit from tiny price discrepancies across markets. When those differences are tiny, speed rules all. Arbitrageurs use algorithms to find opportunities and bots to exploit them before the gap closes.

That’s core to high-frequency trading firms like Citadel Securities and Tower Research Capital.

But you don’t have to be a quant to make money with an arbitrage strategy right now, Ahmed Ismail, president and CEO of Fluid Finance, told Decrypt.

During the conversation he shared his screen and showed that across several decentralized and centralized crypto exchanges, the delta, or difference in prices, for Bitcoin (hands down the most liquid cryptocurrency) was $45. That means someone could have bought $45 worth of Bitcoin on one exchange and doubled their money by selling it for $90 on another.

“I have friends, who, frankly, are not very clever, making tons of money from very, very simple strategies like that,” Ismail said. “These are people who have two years trading experience.”

Fluid Finance, a liquidity aggregator, uses an AI to anticipate price fluctuations across centralized (like Binance and Coinbase) and decentralized exchanges, or DEXs (like Uniswap and Curve). Then Fluid sells assets to users, like Bitcoin, for the best price and takes care of settlement with the exchange.

“We’re kind of the enemy of arbitrage traders in that we use the same strategies as them to predict the market using hyperscale learning and quant-based strategies that are used in the high-frequency trading world,” Ismail said. “And we use that to predict the market and give clients the best possible execution.”

Because there’s a lot of fragmentation and illiquidity in the crypto market, there’s enough room for companies like Fluid and arbitrageurs to coexist.

A lot of arbitrage can be executed completely on-chain, too, Juan Pellicer, a research analyst at crypto market intelligence firm IntoTheBlock, told Decrypt.

For example, Pellicer said finding an on-chain triangular arbitrage opportunity could look something like this: A trader notices that they can buy 1 Wrapped Ethereum (wETH) for 1400 DAI on SushiSwap and that the wETH, a version of Ethereum that can be used on other blockchains, can then be sold on Uniswap for 1,500 US Dollar Coin (USDC). 

“Having DAI, we could buy ETH at $1,400 in Sushiswap and sell it for $1,500 in Uniswap, gaining $100,” he said. 

In a turbulent market, it helps that the last trade in that strategy will be a stablecoin. It reduces the chance that the trader will be left holding an asset that’s going to drop in price before they can realize a gain.

Flash loans and arbitrage

An even more sophisticated version of arbitrage involves flash loans, Caleb Sheridan, Eden Network co-founder, told Decrypt. 

“You can virtually create value out of thin air with atomic arbitrage,” he said. “You don’t have to have any sort of capital  or take risk by holding a huge bankroll. You start off with a flash loan, buy an asset, sell it at a higher price and repay the loan all in one transaction. Your profit is whatever’s left over.”

What atomic arbitrage lacks in the number of people who know how to do it, it makes up for with competition among those that do understand it. 

That’s part of the reason why the Eden Network exists. The protocol allows traders to guarantee placement of their transaction in a particular block on the Ethereum network.

“Anybody can crunch the numbers on Ethereum and figure out if there’s an imbalance and figure out the best and most efficient way to clear the imbalance,” Sheridan said. “It creates like a game between searchers there’s many people looking at the same opportunities and they’re competing against each other.”