Crypto arbitrage is a technique for profiting from the variation in the price of a crypto between two or more exchanges or markets. A trader can benefit from buying low on one exchange and selling high on another, similar to traditional arbitrage. One important distinction between crypto arbitrage and traditional arbitrage is the type of asset being traded.
Crypto arbitrage opportunities are fleeting. Cryptos, on the other hand, are generally more volatile than traditional assets, which can provide more arbitrage opportunities. Arbitrage trading robots are frequently used in the crypto markets, as manually executing crypto arbitrage trades is often extremely slow and difficult to achieve success.
Since price differences for similar assets are usually very small, traders wishing to benefit from crypto arbitrage need to trade high volumes in a short period of time. Before seizing an opportunity, a trader must be registered with various exchanges, have funds on both, and have an account for deposit/withdrawal and trading fees. This strategy has a high barrier to entry, but it has the ability to be profitable for a smart trader (or programmer).
Types of Crypto Arbitrage Strategies
Crypto arbitrageurs can benefit from market inefficiencies in a variety of ways. Among them are:
Cross Arbitrage: This is the most basic framework of arbitrage trading, where a trader attempts to make a profit by buying cryptocurrency on one exchange and selling it on another.
Spatial arbitration: This is a type of cross arbitrage trading. The only difference is that the exchanges take place in different parts of the country. Using the spatial arbitrage method, for example, you could take advantage of the difference in bitcoin supply and demand in the United States and South Korea.
Triangular arbitration: This is the method of transferring funds on a single trade between 3 or more digital assets in order to take advantage of a price difference between one or two cryptocurrencies. A trader, for example, can set up a trading cycle that starts and stops with bitcoin.
Why is cryptocurrency arbitrage considered a low risk strategy?
You may have observed that crypto arbitrage traders won’t have to predict potential bitcoin prices or engage in trades that can take a day or hours to turn a profit unlike day traders.
Traders base their decisions on the intention of making a fixed profit by spotting and capitalizing on arbitrage opportunities, rather than on analyzing market emotions or other price prediction strategies. Additionally, based on the funds available to traders, arbitrage trades can be entered and exited within minutes or seconds. Taking these factors into account, we can come to the following conclusion:
- Since it does not involve predictive analysis, the risk in crypto arbitrage trading is less than in other trading strategies.
- Arbitrage traders only have to make trades that last no more than a few minutes, which greatly reduces their vulnerability to trading risk.
So it is all about crypto arbitrage and how it is profitable in crypto trading. So more market information stay tuned with LCX Overview.