Table of Contents:
- 1. It is possible to find cases of arbitrage trading on crypto exchanges
- 2. Crypto arbitrage – what should we know about it?
- 3. How popular is arbitrage trading in the cryptocurrency world?
- 4. What should we pay attention to while applying arbitrage trading in the cryptocurrency market?
Arbitrage trading is a very interesting way of trading. It basically makes use of anomalies in the value of a selected unit between one exchange and the other. When we notice the imbalance between two markets, we can make profit out of it. To put it simply, we purchase one asset from one exchange and then sell it almost simultaneously at the other when we notice better selling value.
Let us explain it on the example of the food company. At one stock exchange located in New York, the buy value is available for $35 each asset. However, it is possible to sell these assets in Paris for $35.10. Although the difference is small, let us imagine that instead of one unit or two, we purchase thousands of it. For this reason, bulk buying and then bulk selling might provide us with an enormous profit within a few seconds. Essentially, this is what arbitrage trading is all about.
Interestingly, this trading strategy can boast with significantly lower risk of making losses provided we know what we do. A lot of people disbelieve that such “errors” can really occur in such situations.
Truth to be told, there are quite a few reasons why these situations may really happen. First of all, we can be the witness of undervalued stocks on foreign exchanges due to the fluctuations and constant changes in currency value.
Let us not forget that all these exchanges are not ideal and in many situations there can be issues with synchronization. That is why some of the exchanges tend to offer us a bit delayed offers. Let us not forget about the so-called asymmetric information. Remember that there are plenty of events when such arbitrage can take place. Unfortunately, some of the mistakes and errors are so marginal that if we take into account an exchange fee, there will be no profit at all.
It is possible to find cases of arbitrage trading on crypto exchanges
Although we can apply this strategy at cryptocurrency markets, we need to bear in mind that there are several differences. First of all, a political situation has an enormous impact on the arbitrage trading. In the past there were dozens of situations where a political event forced people to either sell all their BTC assets or even buy them. If thing such as this happens, there can be difference in value of Bitcoin or one of the altcoins that exceeds 4-5% per unit.
Of course besides political situations, there are regions in the world that are susceptible to huge FIAT inflation. Although Bitcoin is not affected by it, the drastic changes in the local currency may lead to the urge to sell all the Bitcoins, introducing discrepancies.
Of course even if we remove political, economical, and geographical conditions from the equation, we can still encounter differences in prices at one crypto exchange and another as a result of misinformation, delays, or anything else. This is why we can make use of arbitrage trading in the crypto world.
Crypto arbitrage – what should we know about it?
There are three different methods that we can apply while applying a crypto arbitrage technique. They are known as spatial arbitrage, cross-border arbitrage, and statistical arbitrage.
Spatial arbitrage is a classic and quite common arbitrage that we can encounter in any other type of trading. It basically makes use of discrepancies in prices at different crypto exchanges to our advantage. For example, we purchase BTC for $9900 at one exchange, and then sell it for $10000 at the other. We simply move our funds from one place to another.
The other arbitrage is a cross-border, and it is basically very similar to spatial arbitrage. The primary difference is that the exchanges are located in different countries. However, this particular technique may be difficult to apply, especially in high-priced countries, since their markets are quite often only for the locals. Statistical crypto arbitrage is definitely one of the most difficult ones to apply because it involves a lot of math. In here, we make use of hi-tech strategy in order to create mathematical modelling. It is much riskier technique than the other two, because in here the entire idea is based on algorithms that make profit off pricing discrepancies that appear only in a very limited time window.
How popular is arbitrage trading in the cryptocurrency world?
Although classic arbitrage trading is around for thousands of years now, its popularity is once again starting to grow thanks to the possibility to use it in crypto world. However, we need to remember that many opportunities seem to be very limited.
At this moment there are more than 200 cryptocurrency exchanges out there. It is without a doubt that in some moment, price variations will occur. However, the effectiveness of crypto arbitrage trading is heavily dependent on the volatility in the market. If it appears, then the lucrative profits may disappear as fast as they appeared.
However, due to its features, Bitcoin and all other altcoins characterize with erratic changes in the value. That is why we can make substantial gains. Of course we should bear in mind that there are new approaches thanks to which it is not mandatory to use third party exchanges. Instead, we can join special marketplaces, where people connects directly with each other. In that way we can buy or sell BTC with the use of more than 300 payment methods.
Interestingly, this type of peer-to-peer Bitcoin marketplace allows you to make intercontinental transactions. In that way we can sell our funds to people, where it is much more expensive to acquire BTC. Interestingly, it is possible to apply arbitrage trading in here as a result of huge variety in payment methods. For example, Bitcoin is cheaper to get if we decide to use a bank transfer as a payment method. It is less profitable if we were to acquire them with the use of gift cards.
What should we pay attention to while applying arbitrage trading in the cryptocurrency market?
In order to be cost-effective, we need to remember about additional expenses that characterize crypto arbitrage. Most of us will apply the technique on cryptocurrency exchanges. As a result, we need to remember about fees that many platforms charge. Besides that, some markets also introduce withdrawal fees. It is imperative to consider all these additional costs just to make sure that crypto arbitrage is even worth it.
What is more, we need to bear in mind that in some cases there might be additional obstacles on exchanges. You see, a lot of cryptocurrency markets introduce quite strict regulations as far as the identification is concerned. It may even be mandatory to provide the exchange with an ID document just to complete your identity verification.
We should also remember that exchanges tend to delay withdrawals. Usually, it takes several hours to several business days. Such delay can result in losing the opportunity to complete another trade.