Introduction To Crypto Arbitrage Trading

Published on: 22.11.2022
Introduction To Crypto Arbitrage Trading

Cryptocurrency arbitrage is making a profit by purchasing an asset on one platform and selling it on another at a higher price. Therefore, transaction speed is of the utmost importance, and substantial finance is required for the most lucrative opportunities.

What Is Arbitrage Trading?

To engage in arbitrage trading in cryptocurrency, one must purchase an asset at a discounted rate on one exchange before selling it at a profit on another. Your gain equals the spread between the high and low purchase prices.

Arbitrage is not a new notion; in fact, it has existed in more conventional markets for quite some time. However, the 24-hour nature of the bitcoin market makes arbitrage trading an excellent option. In addition, individuals in many areas of the globe have access to crypto exchanges. And may engage in financial transactions using cryptocurrencies.

However, access to global markets is only guaranteed on the globe. Among the reasons why there are crypto arbitrage chances is because of this.

For instance, South Korea’s tight crypto rules hinder residents from sending large sums of money abroad. South Korean bitcoin exchanges likewise prohibit foreign investment. Because of this, the price of a cryptocurrency on South Korean marketplaces is often more significant than elsewhere.

It happens so often that it has a name: Kimchi premium. Therefore, it is common for South Koreans to profit while purchasing crypto assets overseas. And then selling them on a cryptocurrency exchange in South Korea.

Is Arbitrage Profitable In Crypto?

A sound investment strategy may be to participate in crypto arbitrage. However, due to the small spread between buying and selling prices, this kind of trading is best reserved for those with access to a large capital outlay.

Let’s imagine you make a $25,000 Bitcoin buy on Kraken and a $25,300 Bitcoin sale on Binance, for example. With a $25,000 investment, you will earn $300 after deducting the costs of the currency exchange and Bitcoin transactions. However, if you put in $1,000, you’ll only get $12 back.

While there is less chance of losing money while using an arbitrage technique, there is also less chance of making money. Thus, those with little resources may not see crypto arbitrage as a viable option.

Types Of Arbitrage Trading

Arbitrage trading tactics may be implemented on both decentralized and centralized exchanges. On the back end, however, things look different because you have to wait for your purchase to be filled. When you use an order book to do arbitrage trading on a controlled exchange.

However, decentralized arbitrage transactions are instantaneous since you buy and sell a cryptocurrency already part of a liquidity pool. The most common crypto arbitrage trading tactics are outlined here. Most of the time, Bitcoin will stand in for the discussed crypto asset.

🔸Triangular Arbitrage

Using a triangular arbitrage technique, one may profit by acquiring and trading four or more cryptos without ever leaving the exchange. Any individual whose home nation restricts their access to a wide variety of bitcoin exchange options would benefit significantly from this strategy.

Buying a Bitcoin, trading it for Ltc and Solana, and then exchanging the Solana back for Bitcoin illustrates triangular arbitrage. If the arbitrage deal is successful, you will accumulate Bitcoin from the price differences along the route.

🔸Statistical Arbitrage

Some human traders, especially those with experience in developing or understanding mathematical models. Might decide to take a more customized statistical model for arbitrage trading than the one used by bots. Python is widely used in the field of algorithmic arbitrage trading.

By doing so, additional arbitrage transactions may become possible. However, developing this expertise requires patience, so many people use bots instead.

🔸Bot Arbitrage

Looking for price differences across numerous exchanges, as is required for arbitrage trading, may be a time-consuming process in and of itself. However, with the help of bot software, your bots may actively seek. And act upon arbitrage possibilities without you having to lift a finger.

🔸Cross-exchange Arbitrage

The traditional form of arbitrage is the cross-exchange approach. You may buy and sell Bitcoin at contrastingly low and high prices in two markets. You’ll buy Bitcoin when it’s cheap and sell it when it’s expensive, pocketing the difference.

Risks Of Arbitrage Trading

Risks to an arbitrageur’s potential profits due to external circumstances should be considered. Since arbitrage possibilities often offer minimal earnings due to their low-risk profile, this is an important consideration when evaluating them.

🔻Fees: Note that deposit, withdrawal, and trading costs might be incurred while engaging in arbitrage trading between two exchanges. These charges may add up and cut into your earnings.

🔻Timing: Time is of the essence while engaging in crypto arbitrage transactions. As more investors take advantage of a given arbitrage opportunity, the pricing gap between the two markets tends to close.

🔻Security: Arbitrage traders are especially vulnerable to exchange hacking. And exit scams since they must deposit large sums of money in exchange wallets. It is called an “exit scam” when a firm abruptly shuts down while taking consumers’ money.

Crypto Arbitrage Strategies

Some of the most effective strategies used by crypto arbitrage traders are outlined here.

🔹Scout Newly Listed Coins

Tokens that have just undergone an ICO or been uploaded to an exchange are likely to have different pricing than tokens that have been available on that exchange for some time. In addition, the value of new tokens often increases exponentially.

🔹Limit Your Exposure

Keeping your trading exposure low is a must. Never risk more than you can afford to lose while arbitraging. No matter how fast or sure a transaction looks, you should only risk a small amount of your overall portfolio on it.

🔹Stay Up to Date With Local Laws

In nations where the legal status of cryptocurrencies is uncertain, arbitrage might be a significant opportunity. For example, after reports surfaced in November 2021 that the Indian legislature was considering a crackdown on crypto merchants, digital assets began selling at severe discounts.

Conclusion

As a trading method, arbitrage might be helpful for cryptocurrencies. However, profiting from disparities in asset prices requires an initial investment and the self-discipline to carry it through to a successful conclusion.

Market Stats:
BTC Dominance: 38.34%(+0.04%/24h)
ETH Dominance: 18.25%(+0.20%/24h)
Defi Market Cap: $37.95B(+3.69%/24h)
Total Market Cap: $864.27B(+1.34%/24h)
Total Trading Volume 24h: $31.83B(+3.89%/24h)
ETH Market Cap: $155.57B
Defi to ETH Ratio: 24.39%
Defi Dominance: 4.21%
Altcoin Market Cap: $532.95B
Altcoin Volume 24h: $14.29B
Total Cryptocurrencies: 21926
Active Cryptocurrencies: 8975
Active Market Pairs: 58579
Active Exchanges: 528
Total Exchanges: 4363