What is Arbitrage?
Arbitrage is the act of buying and selling assets from different exchanges to another in order to make a profit from the price discrepancy. The price discrepancy or imbalance is known as the spread. To carry out arbitrage, you have to purchase an asset from one exchange at a lower price and immediately sell the asset at another exchange for a higher price.
Crypto Arbitrage Trading is the process of buying a digital asset on one exchange and selling it on another where the price is higher. Doing so helps in making profits through a process that involves limited risks.
Cryptocurrency arbitrage is about leveraging prices to your advantage. Crypto trading has been around for quite a few years now; however, the prices of cryptocurrencies vary from one exchange to another. Each crypto exchange has its value for specific cryptocurrencies, and this may be due to multiple reasons. Crypto arbitrage helps traders take advantage of the price difference by buying cryptocurrency from one exchange and selling it on another immediately.
Cryptocurrency trading is quite difficult, and there are several risks involved, mainly due to the volatility of the crypto market. You never know when the prices may soar or dropdown. To become a successful crypto trader, you need to analyse patterns in the price charts to predict future movement.
Crypto arbitrage is one trading technique that helps traders earn profits from the crypto market inefficiency.
Crypto Arbitrage Trading is when a trader buys a cryptocurrency asset in one place and stores and sells when the price has gone high or immediately sells it in another at a higher rate, using the price difference to make a profit.
For example, if 1 BTC token on Binance sells for $ 61,000, while it costs $ 61,300 on Coinbase, then you can buy 10 BTC or more on Binance and sell them on Coinbase, which will bring you $3000 profit or more (minus commissions and other costs).
The main thing here is speed, since currency rates change very quickly and you need to have time to take advantage of their discrepancy.
There are numerous crypto exchanges in the market. With so many, there’s a wide range of arbitrage opportunities. According to Coindesk, there are more than 400 cryptocurrency exchanges in the world today.
There are four distinct ways to do Crypto Arbitrage Business:
1). REGULAR ARBITRAGE
This refers to regular buying and selling the same digital assets on different exchanges with significant price differences.
2. SPATIAL ARBITRAGE
This is when an arbitrageur uses geographical factors to buy an asset from an area and sell it at a different place at a higher price.
It is the most simplistic form of arbitraging. In spatial arbitrage, you buy a cryptocurrency in an exchange and immediately sell it in another exchange, gaining from the price differences in the two exchanges. To take advantage of spatial arbitrage, you have to buy where the price is low and sell where there is a significant price rise.
For instance, you can buy 1 Bitcoin at the rate of $60,000 from Ada and sell the same volume of BTC at $61,200 on Binance.
Note that the problems with this kind of arbitrage include transaction costs on the two exchanges and transfer time. You have to be very fast with your transaction, otherwise, the price might have risen where you intend to sell.
3) TRIANGULAR ARBITRAGE
Triangular arbitrage involves price differences between three currencies on the same exchange. You try to take advantage of price differences through several conversions.
For example, you buy BTC with USDT, sell BTC to ETH, and convert ETH back to USDT.
You can trade BTC for ETH, ETH for USDT, and ETH back to BTC. The problem with triangular arbitrage is that it can be difficult for people who are new to cryptocurrency trading to be able to compare the price of different assets or know which assets to pair.
If you are confused, then multiply the amount you are trading by the exchange rate of the first pair of cryptocurrencies, then divide it by the exchange rate of the third pair of cryptocurrencies. If the answer is more than the amount you want to trade, then you can make a profit, that is, after you deduct trading fees.
4. AUTOMATED ARBITRAGE
Some companies specialise in providing tools for automated crypto arbitrage.
They use a bot to automatically carry out the trade. The high levels of volatility in crypto exchange can lead to a change in the intended price and rather than profiting from arbitrage, you can make a loss. A bot can perform a task automatically and in less time. The moment there is a slight change in price which a crypto trader can benefit from, the bot will capitalise on it.
Crypto arbitrage bots use algorithms that analyse data and trends, especially coin prices across many exchanges then carry out trades based on the observed differences. This is not financial advice! Use at your own risk!
Cryptocurrency Arbitrage Risks and How To Avoid Them.
These are the most critical variables you should consider when choosing an exchange for crypto arbitrage:
1. FEES: High or low trading, deposit or withdrawal fees can make or break the deals. Go for low fee exchanges whenever possible.
2. GEOGRAPHICAL AREA: Some exchanges or some of their features may be restricted or limited in your area, so you need to be aware of it before making a trade.
3. REVIEWS: See what reviews and other people are saying about certain exchanges before you deposit your funds. There are many shady and unregulated platforms in the industry, so it is better to play it safe than cry later.
4. TRANSACTION TIMES: Some blockchains allow quick transactions, while others can up to an hour or more during peak times.
5. WITHDRAWAL TIMES: Some exchanges make manual fund withdrawals which occur only once a day or so, so be aware and understand the rules before entering one.
6. ACCOUNT VERIFICATION: Some exchanges may not allow you to withdraw funds or fully use the markets before you verify your account, which can take several days or even several weeks at a time.
7. MARKET LIQUIDITY: Not every exchange has enough liquidity, especially if you’re looking to buy or sell large quantities of digital assets.
8. WALLET MAINTENANCE: Most arbitrage opportunities occur due to wallet maintenance in certain exchanges, so make sure to be aware of whether you can withdraw or deposit the crypto assets of your choice.
The crypto market is renowned for being highly volatile compared to other financial markets. There seems to be more hype surrounding the potential of arbitrage opportunities in the crypto scene. Crypto asset prices tend to deviate significantly over a certain time period. Since they are traded globally across hundreds of exchanges 24/7, there are far more opportunities for arbitrage traders to find profitable price discrepancies.