Arbitrage trading is considered by many to be surefire profit. This simple trading strategy has been used for hundreds of years to help generate low risk and, in some cases, almost guaranteed profit. This begs the question: “Is Crypto Arbitrage Trading a Strategy You Should Try?”
To help you decide, here are the basics of arbitrage trading, crypto arbitrage, arbitrage bots, and some of the risks of arbitrage trading.
What is Arbitrage Trading?
Arbitrage trading involves capitalizing on a situation where an asset has a low price in one place and a higher price in another, at the same time. If you are able to buy it at a low price and then resell it at a higher price before it goes up, you can make a profit. The concept is literally as simple as that.
For example, imagine that a company’s shares are listed on both the Nasdaq in New York and the Tokyo Stock Exchange in Japan. In New York, you can buy the stock for $20.00 per share. However, you notice that in Tokyo you can sell it for $20.50. If you have accounts that give you access to both markets, you can buy in New York and sell in Tokyo seconds later for an instant profit. This is arbitrage trading. Crypto arbitrage trading is very similar.
How Does Arbitrage Trading Work in Crypto?
Just like in other forms of arbitrage trading, crypto arbitrage is based on exploiting price discrepancies. Here are some of the factors that give rise to arbitrage opportunities:
- Inflation: The price of a currency can rise in one region of the world while remaining low in another due to differences in inflation. For example, if inflation pushes prices up in Algeria, the price of cryptocurrencies may also rise. If these same cryptos remain unchanged in the United States, an arbitrage opportunity may arise.
- News and Events: News events can push prices up or down sharply and quickly. For example, if major legislation is passed in the UK that people widely interpret as bad for the economy, the value of the pound could fall. The cost of buying bitcoin could also drop, but only in the UK. If the price remains high in another region, there may be favorable conditions for an arbitrage transaction.
- Slow server connections: Each exchange must communicate through a server in order to obtain prices. If an exchange has a slow connection, there can be precious milliseconds between when the price moves and when the exchange gets that information. With some trading bots, it is possible to buy low on the fast exchange and sell higher on the slower exchange.
What are some cryptocurrency arbitrage strategies?
There are a few different crypto arbitrage strategies that traders have adopted. Here is a basic breakdown:
- Spatial – When two platforms have different prices
- Cross-border – In case of price discrepancy due to different economic conditions in two or more countries
- Statistical arbitrage – Use of algorithms to detect momentary price differences
- Triangular arbitration – Trading operates in a monetary “triangle”. For example, you can buy bitcoins with USD, then buy Swiss francs with your bitcoins, then buy USD again with your francs.
How Arbitrage Trading Bots Can Help
Naturally, it is next to impossible to see all of the available arbitrage opportunities at any given time, even if you only focus on a few exchanges and one or two cryptos.
With arbitrage trading bots, it is possible to both see opportunities and take advantage of them in fractions of a second. The bot spots the gap and executes the trade for you.
The Risks of Crypto Arbitrage Trading
So if crypto arbitrage trading is so easy, why isn’t everyone doing it? The answer is twofold: you can lose money because of the fees and because the spread disappears before the trade can be executed.
Costs: The fees associated with trading digital assets are so high that they prevent arbitrage trading. If you could make $200 on a trade, but after it’s all settled, you’re looking at a fee of $205, it wouldn’t make sense to pull the trigger.
The arbitrage opportunity disappears: Often, arbitrage opportunities are short-lived because one or both markets adjust. If this happens during your transaction, you risk losing money.
Arbitrage trading, under the right conditions and with the right technique or bot, can potentially generate handsome profits. Do your research and assess your risk tolerance before deciding whether or not to try arbitrage trading.
To stay up to date with the latest trends in the digital asset markets, subscribe to the Bitcoin Market Journal.