How to Evaluate Crypto Exchanges

In cross-exchange arbitrage, you don't evaluate stocks or bonds. Instead you evaluate reliability of exchanges. You don't track whether a stock goes up or down in price. Instead you look at the spread between prices on different exchanges.

For each exchange you evaluate:

  1. Price
  2. Reputation
  3. Costs
  4. Speed

Price

In arbitrage, the first criterion is price. You need to find the low price sellers, and sell to the high price buyers. Most exchanges are somewhere in the middle, so you can eliminate them right away. TopArb Trader shows you all the best arbitrage opportunities at a glance, updated instantly.

Sometimes an exchange has a price that is very different. Usually it's because that exchange has a whale in a hurry. That's exactly the kind of trading opportunity you want.

But occasionally a great price is for a bad reason, such as an exchange that isn't processing withdrawals.

Don't choose just on price. Some of the very best prices are only available under very unattractive conditions. For example, an exchange may require that you provide them with a huge deposit or far too much private information.

Reputation

Just as in traditional trading you spend the biggest part of your time analyzing stocks or bonds, in cross-exchange arbitrage your time goes into analyzing exchanges. This is an area where people still have a huge advantage over algorithms and AIs. Your judgement is crucial. TopArb automates almost everything else.

To evaluate an exchange's reputation you need to know:

  1. People's experience with the exchange.
  2. How the exchange makes its money.
  3. How hard it is to withdraw your money.

Until you're confident about an exchange, keep deposits low and trades small. As you build trust, you can consider increasing your limits.

Most exchanges are good, or they couldn't stay in business. But just like with stocks, you are going to find some losers. It's easy to stop losses from bad exchanges. You simply don't do business with that one again. They may take your money once, but that's it. Cross them off your list, and refuse to give them any more time or money.

Costs

Net Profit = Gross - Costs. The spread, the difference between prices on two exchanges, is your gross margin. But a non-zero spread isn't enough. You have to pay all the costs associated with a trade. Make sure you know at least roughly what these are. A common estimate is 2%. The spread has to cover your costs. If you can't make a profit on trades with an exchange, their prices don't matter.

Transaction costs include all the fees from the exchanges and any cost of moving money. If you borrow money for a trade — a riskier choice — include the cost of borrowing.

Making a profit is the obvious goal, but the profit also has to be big enough. If you are an independent trader, you need to consider all the costs of running your trading business. You need to pay yourself. You should consider capital accumulation, savings, etc.

When you know your costs, it's easy to decide if a trade is worth it.

Speed

Most traders want to make a lot of money, not just an income. Since you don't get rich on any one trade, you need a lot of them. That's another way cryptocurrency arbitrage shines. You make short trades with high confidence, so you can make a lot of them. Obviously the more good trades you make, the more money you make. First, your profit on trades adds up. Second, if you don't take all your profit as income, your capital grows, giving you even more profit per trade.

Your profit over time depends on how many trades you do in that period, your trading frequency. With cryptocurrency arb each trade is effectively a compounding period. Every delay from an exchange reduces your trading frequency. Pay close attention to how long an exchange takes to credit deposits, execute orders, and pay out. A fast exchange with a lower spread may make you much more money.

You want your capital to compound fast. Every profitable trade adds to your capital. A trade with a profit of 2% makes more money when you put in more capital. But always consider how much of your money you trust an exchange to handle.

Action plan

  1. Select candidate exchanges based on prices.
  2. Research:
    • The reputations of the candidates.
    • Which currencies they trade.
    • How they make their money.
    • How hard it is to withdraw money.
  3. Choose your first exchanges.
  4. Open small accounts.
  5. Test small trades.
  6. Grow deposits and trades as trust grows.

Learn more.