Arbitrage opportunities are becoming more and more prevalent in the crypto industry and offer traders an attractive way to maximize their earnings with comparatively less risk. Cryptocurrency arbitrage is a type of trading strategy where investors exploit most of the slight price differentials of a digital asset across multiple markets or exchanges. Simply put, crypto arbitrage trading involves buying a digital asset on one exchange and simultaneously selling it on another where the price is higher.
This helps to make profits through a process that had limited risks. The other advantage of this strategy is that you don’t have to be a professional investor with an expensive setup to start arbitrage trading.
What is arbitrage trading?
The crypto market is known to be very volatile compared to other financial markets. There seems to be more hype around the potential for arbitrage opportunities in the crypto scene. The prices of crypto assets tend to deviate significantly over a period of time. As they are traded on hundreds of exchanges around the world 24/7, there are many more opportunities for arbitrage traders to find profitable price spreads.
All traders need to do is spot a difference in the price of a digital asset on two or more exchanges and complete a series of trades to take advantage of the difference.
Why is cryptocurrency arbitrage considered a low risk strategy?
Unlike day traders, crypto arbitrage traders do not have to predict the future prices of bitcoin and other cryptos. They also do not enter into transactions that could take hours or days to generate a profit. By spotting and capitalizing on arbitrage opportunities, traders expect a fixed profit without necessarily having to analyze the market or use other predictive pricing strategies. Additionally, depending on the resources available, traders can enter and exit an arbitrage trade within seconds or minutes.
Types of arbitration
- Spatial Arbitrage: This type of arbitrage involves buying crypto on one exchange and immediately selling it on another.
- Convergence Arbitrage: Here a trader buys coins bought on one exchange and sells them on another exchange. The objective is to see the two prices converge, that is to say when the trader closes the two positions.
- Triangular Arbitrage: This complicated strategy involves trading on multiple trading pairs.
Center for banning private cryptocurrencies
Currently, the cryptocurrency market in India has suffered from volatility on Tuesday, following reports that an anti-crypto bill could be introduced later in the winter session of parliament. The central government is expected to present “the Cryptocurrency and Official Digital Currency Regulation Bill, 2021” during the winter session of Parliament, which will restrict the use of most cryptocurrencies, except for a few. As of this morning, all major cryptocurrencies had fallen 15% or more, with Bitcoin down over 17%, Ethereum down nearly 15%, and Tether nearly 18%.