Trading on cryptocurrency is a common practice these days. It is challenging, as there are plenty of risks involved in it, because of the volatile nature of the crypto market. Despite all of this, if you are an experienced trader and want to take it to the next level then Crypto Arbitrage Trading is a nice prospect for you. In simple terms, when traders buy on one exchange and sell on another exchange immediately, it is called arbitrage trading.
If you are interested in Crypto Arbitrage Trading, this article will tell you all you need to know.
WHAT IS CRYPTO ARBITRAGE TRADING?
To put it in simple words, we buy from one Cryptocurrency Exchange and sell on another. We make a profit by buying it at a low price from the first exchange and selling it at a higher price on another.
In Arbitrage trading, traders don’t take advantage of the price movements in a coin or a currency instead they profit from the price differences between the exchanges. It is different from other trading strategies. Here, traders need to snatch the carelessness of the market and make a profit out of it. This happens regularly with cryptocurrencies because of the highly volatile nature of these commodities.
PROS AND CONS OF ARBITRAGE TRADING
PROS: –
1– We are buying and selling the currency simultaneously so there is no long-term investment risk involved.
2- The more the market is volatile, the more profit a trader can make through Arbitrage Trading.
3- It can be done regardless of the market direction. Though, during the bull markets, there are more arbitrage opportunities. This is because traders concentrate on riding the bull run rather than focusing on little price differences between the exchanges.
CONS: –
1- The trader has to look after the transaction fee, as there is a lot of it involved in Arbitrage Trading. One shouldn’t be careless about this, it can bring the profits to minimum amounts.
2- We have all seen sudden freezes or crashes of exchanges. It is possible that an exchange shuts down and takes all your capital with them.
3- To make good profits by Crypto Arbitrage Trading, a good trading software with all the latest features is a must, It will help the trader to take the trades quickly enough to make a profit.
TYPES OF CRYPTO ARBITRAGE
There are three main types of arbitrage: Spatial Arbitrage, Convergence Arbitrage, and Triangular Arbitrage. Below we’ll try to understand what each of those names means:
1- SPATIAL ARBITRAGE
Spatial Arbitrage is the most common method of Arbitrage trading. It involves buying a cryptocurrency from one exchange and selling it to another. The major work here is to quickly transfer the crypto from one exchange to another before the price on the other exchanges changes as well. A trader has to watch out for all the costs involved in the transfer too.
2- TRIANGULAR ARBITRAGE
Triangular Arbitrage is for traders who are able to understand its complexity. Here, we don’t just exploit the price difference between different exchanges, but also change the currency to increase our profit margin in the process.
Start by buying a currency by any crypto arbitrage opportunity you find, then you exchange that coin or currency for another currency, then at the last part of the triangle you can purchase the same coin you brought at first with the one you currently hold. It is not mandatory in Triangular arbitrage to exchange just one currency in the process.
3- CONVERGENCE ARBITRAGE
This type of arbitrage involves a long/short trade. The arbitrageur buys underpriced crypto from one exchange and sells the overpriced ones. It is a very common stock markets derivative trading strategy. For understanding Convergence Arbitrage in detail, Future and Options knowledge is a must. We exit this trade when both the prices meet in the middle. That is when we sell the long trade and buy back the short trade we took.
IS CRYPTO ARBITRAGE PROFITABLE?
As long as price differences remain, Crypto Arbitrage can certainly be profitable. But that does not mean that it is easy. Every tiny fee can be significant so you have to be careful. It is less risky than many other types of trading. If you’re buying and selling crypto on two exchanges, it is not possible for you to make enormous profits every time. You are just taking advantage of the price difference between different exchanges. If you understand what you’re doing and you trade with decent amounts that you can afford to lose, not much should go wrong.
There are multiple arbitrage techniques and opportunities that one can benefit from, whenever there is a market inefficiency. As more traders are indulging in arbitrage, these opportunities start to disappear as soon as they arrive. Arbitrage trading helps the market to stabilize, and the prices may end up similar across various exchanges. Crypto arbitrage helps bring the exchanges together onto the same page. As the crypto market grows, the gap between exchanges will narrow as more and more people will conduct crypto arbitrage. Nowadays, almost all exchanges have an API(Application Program Interface), which can become a helpful crypto arbitrage tool.
Additionally, if we utilize these APIs it will allow us to create a custom crypto arbitrage bot. So, you don’t have to sit in front of the computer all day. Still, if you can’t afford to purchase an API software you can do arbitrage on your own. You just need to watch closely and make sure you are placing simultaneous trades. However, all kinds of trading come with high risks, therefore, beginners need to be extra careful, or they could end up losing a lot.