Table of Contents
A crypto arbitrage bot is a trading program written to analyze markets, identify profitable arbitrage opportunities for traders, and then execute trades. This automatic process is designed to keep a watch on the prices of different cryptocurrencies in the market across several exchanges.
Whenever a bot encounters a profitable trading opportunity, it buys an asset on one exchange where that asset is trading at a lower price and sells on another exchange where the same asset is trading at a higher price, thus clocking in the profits for traders.
How Vast is the Crypto Arbitrage Market?
The overall crypto arbitrage market is only a fraction of the entire cryptocurrency trading market. Crypto arbitrage activities account only for approximately 0.03% to 0.05% of the trading volumes on layer 2 scaling solutions. As per a study of 2017-2018, the average arbitrage index within the U.S., Europe, Japan, and Korea ranged from 1.01 to 1.03.
Still, there is an interest in arbitrage trading among users, especially institutional investors because they have millions of dollars and other resources to earn profits even from tiny bid-ask spreads. They use High-Frequency Trading (HFT) bots to carry out trades in milliseconds.
Who Uses Arbitrage Crypto Bot?
Three different types of traders use arbitration bots. These can be retailers who are looking to book small profits here and there. They expect a small but steady inflow of profits. Institutional investors, as mentioned above, are the large firms and hedge funds that use crypto arbitrage bots on a large scale. Then are the Market Makers who provide liquidity to Decentralized Exchanges (DEXs). Like Institutional Investors, they use HFT bots to exploit price differences across markets.

Why Would a Trader Use Such a Bot?
To be profitable in arbitrage trading in crypto, traders need to be quick, and vigilant and must identify profit-making opportunities correctly. They must execute trades with speed and there is no scope for mistakes. Though manual arbitrage trading strategies can bring profits, the use of a crypto arbitrage bot is recommended for the following reasons:
An arbitrage crypto bot automates the profit-making process. The bots, like manual trading, capitalize on price fluctuations across different markets; these differences arise due to differences in liquidity, volatility, volume, and demand. However, the trades executed by bots are instantaneous and are carried at considerably higher speeds than those done manually. They help eliminate manual delays that are common occurrences with traditional arbitrage trading counterparts.
An arbitrage bot crypto can clock in higher profits than a human trader. This is because a bot can scan multiple exchanges together and carry out trades with precision. Therefore, there are high chances of maximizing profits even from small price differences. This is particularly advantageous to HFT strategies that help traders make small profits on a repeated basis; all of which add up to become a bigger amount.
The crypto market is open 24*7 and so are bots. An arbitrage bot operates round the clock and is designed to never miss a profitable moment (though that is possible).
Another big plus point of a crypto arbitrage bot is that it eliminates all human emotions like greed, fear, and hesitation; this means there are no hasty or inaccurate decisions taken by a bot. It just follows its algorithm religiously and sticks to it, making no bad trading decisions.
A single bot is highly efficient; it can monitor a couple of exchanges in parallel and can make decisions in real-time. This is impossible with a human trader.
The strategies for an arbitrage crypto bot are designed to run automated risks only. These bots keep in account risk factors like trading fees, slippage, and liquidity; this ensures that the traders can explore those prices that can bring about maximum profits after factoring in these risks. Advanced bots can even adjust their strategies according to market conditions and ensure that losses are minimized.
How Do You Select a Crypto Arbitrage Bot?
Selecting a bot is a critical process and must be taken seriously. You should look out for several factors before zeroing in on one. These factors would not only let you select the best crypto arbitrage bot that maximizes your profit but would also help you limit your losses that can otherwise eat into your gains.

Security: The most important determinant while deciding upon the best bot for your trading is its level of security. Check if it offers features like API encryption and two-factor authentication, and provides secure fund management. Research the arbitrage bot’s history; read its reviews and watch official videos.
Keep user feedback in mind. Also, make sure that your arbitrage bot crypto does not ask you to deposit additional money for added security features. Check regulatory compliance; thoroughly research if it follows all the legal guidelines set by financial regulators of the region/country you belong to.
Supported Exchanges and Crypto Pairs: Do not forget to inquire if the bot you selected is not banned on major cryptocurrency exchanges. The arbitration bots are supported on high liquidity exchanges. Before settling on one crypto arbitrage bot, see if it supports your preferred trading pairs. If you have some DeFi arbitrage strategies on your radar, make sure that the bot you are going for specializes in that.
Speed and Latency: It is another important aspect to consider. Since, price gaps on exchanges close very quickly, your bot must be superfast to identify and execute the trades for you. Select the ones with low latency rates. Generally, it is better to go for those that support cloud-based or Virtual Private Server (VPS) hosting. Such automation bots are deployed on a remote server and provide better speed and security than those hosted on local machines.
Trading Strategies: A crypto arbitrage bot that offers multiple trading strategies and provides customized trading parameters should be given the preference. Some advanced bots let you customize variables like stop-loss, slippage limit, and take profit (preset price level at which the bot will sell your position and book profits for you).
Use of AI Arbitrage Bot Crypto: Artificial intelligence-based bots are more efficient and make better decisions than traditional bots. They use machine learning to analyze and adapt over time. They can scrutinize large amounts of market data, recognize complex trends, and make correlations between prices. As they continue to improve their arbitrage strategies, they are always a better choice than their counterparts.
Fees and Cost: An exchange charges a trading fee every time a crypto arbitrage bot buys or sells an asset. If this fee is high, your otherwise successful trading strategy would bring you lesser profits or even eat away all of the gains. Also, when you transfer your funds between exchanges to close your arbitrage position, a withdrawal fee may be charged.
There may also be other sorts of fees like deposit fees and network fees. Fees are not a bot selection criteria but you should select the exchange with low charges. Regarding costs related to a bot, there can be operational costs. If you run your bot on a cloud or VPS, you may have to pay operational costs. These costs must be factored in before calculating your profits from arbitration strategies.
Risk Management: Crypto prices may undergo unexpected movements in either direction. Your bot selection criteria must keep this in mind. Go for a bot that has a built-in risk management system. Your arbitrage crypto bot must be able to limit losses and should trade only on those markets that have enough liquidity so that it is difficult for big players to manipulate prices.

Strong API Integration: This is supremely important as your bot should be able to integrate well with all the exchanges’ APIs for faster strategy execution. Different exchanges support different types of orders (market orders, limit orders, etc.). A well-integrated bot will be able to execute the right orders at the right time. Y
our bot selection criteria should also keep in mind the ‘rate limits’ imposed by an exchange. A rate limit means how many API calls can be made within a given period. If your bot makes more number of calls than that, it could get temporarily blocked.
A Strong Customer Support: Select a well-known bot that provides a strong customer support system, and has a strong community behind it. Make sure that it is active on major social media channels. If your bot is not working or gets faulty, you must be able to seek help from its customer care quickly.
Scalability: Yet another factor to take into consideration before selecting an arbitrage crypto bot is scalability. Your bot functions exceptionally well for small trades but may fail to do so for high trading volumes. If you are looking for enterprise-level bots, select the ones that have higher scalability.
What Risks Are Involved?
The selection criteria I listed above, if not taken into account, can turn into potential risk factors.
High exchange fees and frequent buying/selling by your bot can destroy your profits. Trading fees, withdrawal fees, and deposit fees can play havoc on the amounts an arbitration bot earned you.
Price slippage is another risk associated with your arbitrage crypto bot. Crypto prices change from moment to moment; if the price changes by the time your bot executes an order, your profits get diminished. There may also be delays by bots in executing an order due to network congestion and low liquidity issues.
If the number of API requests made by the bot exceeds the limit set by that exchange, the trading will be canceled. Also, an exchange may be down for maintenance or upgradation; at such times, your bot would be practically useless.
Market manipulation by pumping and dumping the prices can lead to losses. Also, flash loan attacks can lessen your chances of making profits.
Bots may malfunction at times due to several reasons. At such times, your trades would either fail, or gained profits will turn into losses.
If the bid-ask spreads are too tight, there is not much scope for gaining money. High competition may also mitigate the gains to a great extent. Look for markets with low competition and use high-speed bots.
Smart contract vulnerabilities are another risk that a crypto arbitrage bot may have to face. If there are security flaws in the contract, you may end up losing all your money in no time.
How Does an Arbitration Bot Work?
The bot, when up and running, continuously scans multiple exchanges and collects real-time data. It monitors price changes, trading volume, and order book depth.
It then applies the technical indicators to analyze price trends. It employs predefined trading strategy rules that are either set by you or are built into the bot’s algorithm. Based on its analysis, an arbitrage crypto bot decides if to buy, sell, or hold an asset.
Based on the decision it makes, the bot auto-places the buy-sell order via APIs connected to various exchanges. It also takes care of the stop-loss and take-profits factors. Advanced bots also implement slippage control and portfolio rebalancing. To garner more profits, it may even adjust its trading strategies depending on market conditions. For example, if there is high volatility in the market, it may switch its decision from buy to hold. It can also discard one strategy in favor of the other.

Are Arbitrage Crypto Bots Illegal?
The answer is “it depends”. If used within the legal restrictions of a region or country, they are not illegal. But in the following cases, they are considered illegal:
If you are using your bot to manipulate markets (pump and dump, wash trading, spoofing, or front-running), it is considered illegal. If the bot is operating on an unlicensed service, it would be considered unlawful to use. Your bot must follow the exchange policies and should not operate in countries that have banned them altogether.
In the United States, using a crypto bot is legal as long as it follows the SEC and CFTC regulations. In the UK, it comes under the jurisdiction of the FCA (Financial Conduct Authority). Likewise, in Europe, trading with bots must be carried out in line with the regulations set by MiCA (Markets in Crypto Assets). In UAE, trading with a crypto arbitrage bot is allowed on regulated exchanges that come under Dubai’s VARA network.
Binance Arbitrage Bot
To understand how an arbitrage bot works, let me explain with the example of Binance.
Binance provides a Funding Rate Arbitrage Bot for traders. To use one, you must know what is a funding rate. It is an interest rate that either a trader who is long for an asset pair in one market pays to the one who is short in other markets for the same asset. For example, a funding rate arbitrage strategy takes advantage of the price differences between the spot market and the future market.
Let us assume that the price of an asset in the futures market is higher than its spot market price. So, a trader can take a short position in the futures market and a long position in the spot market. The long-position traders would pay the funding rates to the short-position traders. This is called a positive funding rate.
Conversely, if the price in the futures market is lower than the spot market price, a trader would take a short position in the spot market and a long one in the futures market. In this case, the short-position traders would pay the funding rate to the long-position traders and the funding rates would be negative.
On Binance, one can make use of the arbitrage crypto bot strategies based on funding rates. This bot from Binance makes profits via funding fees related to futures markets. As explained above, there can be two cases: when there are more people who are long in the Binance Futures market, they pay a funding fee to those who are short (which leads to positive funding rates).
On the other hand, if there are more shorts in the market than long traders, and you are long on a crypto asset, you would get a funding fee ( which leads to negative funding rates).
Binance has two types of funding fee arbitrage bots: positive carry and negative carry. Positive carry means that the price an an asset in the futures market is higher than the spot market, which means traders in the future market are willing to pay more than the current market price.
With a positive funding rate, long traders in the future would pay the funding fee to short traders on Binance Futures. Therefore, the bot will take a long position in the Spot Market (at a lower price)and short in the Futures Market (at a higher price). Over time, when the price difference narrows, the bot will profit from price convergence and funding rate payments.
The exact opposite is true for a negative carry.
You can view real-time funding rates of different crypto pairs and funding history for a particular pair on Binance Futures site:


How to Start Binance Arbitrage Crypto Bot?
Log into your Binance Account. On the primary menu bar, expand the Trade option.

Under Advanced, click Trading Bots.

On the Arbitrage Bot box, click Create.

This opens the trading window.

For Positive Carry trading pairs, select a pair for the Spot and the Futures (Perpetual) market. As you can see in the screenshot, the funding rates are positive.


Enter the Investment Amount in USDT. The system will calculate the estimated position size. Click Create. Confirm Binance trading bots terms.


Confirm your order.

Your crypto arbitrage bot comes into action.

After a while, its status changes from “Staring “to “Working”. If everything goes fine, you will see your total funding fee accumulating and the market value of your investment grow.


Click Exit to stop the bot when your profit target is reached.
Risks Associated with Binance Arbitrage Bot
Binance Arbitrage Bot runs the leverage risk as the exchange provides leverage for assets in the perpetual market. For example, if you short BTC with 2X leverage and the price starts rising very rapidly, you may run the risk of liquidation on the short side. Also, there is a funding rate risk associated: if the funding fee starts working against you (goes from positive to negative or vice versa), you will lose money instead of gaining.
Read more on arbitrage trading in crypto here.
Conclusion
A crypto arbitrage bot automates your trading and makes the processes faster and less error-prone. Select a bot that is secure, has low latency, supports multiple exchanges & crypto pairs, and can carry out multiple transactions in no time.
Disclaimer
This article is for informational purposes only and is NOT a financial advice. We do not promote, in any form, any cryptocurrencies or tokens mentioned herein. The content of this article is based on the information available up to the knowledge. You should be aware that investing in any cryptocurrency is subject to market risk and you MUST do your own due diligence (DYOR) before you put any money in any of the coins.
Read More Cryptocurrency Articles
Top Blockchain Gaming Companies