Tag: Arbitrage trading

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Cryptocurrencies

Arbitrage Trading in 2021? Here Is How I Make A Kill

Cryptocurrency provides so many avenues for people to make money. Whether it’s trading, mining, staking, or lending, you can make money from crypto in any of several ways. However, one method that flies under the radar (and hence many people don’t know about!) is arbitrage trading. Arbitrage trading is a way through which you can make extra cash in a (relatively) risk-free manner.

Cryptocurrency provides so many avenues for people to make money. Whether it’s trading, mining, staking, or lending, you can make money from crypto in any of several ways. However, one method that flies under the radar (and hence many people don’t know about!) is arbitrage trading. Arbitrage trading is a way through which you can make extra cash in a (relatively) risk-free manner.

Cryptocurrency provides so many avenues for people to make money. Whether it’s trading, mining, staking, or lending, you can make money from crypto in any of several ways. However, one method that flies under the radar (and hence many people don’t know about!) is arbitrage trading. Arbitrage trading is a way through which you can make extra cash in a (relatively) risk-free manner.

This article explores the world of arbitrage trading. And, in the end, you will know whether it’s for you. 

What’s Arbitrage Trading? 

Arbitrage trading is an approach to trading that exploits the differences in the price of a cryptocurrency in various exchanges. For instance, let’s say Bitcoin is trading at $9,000 on Coinbase but at $9,200 on Huobi. A savvy trader might move in to take advantage of this price difference by buying the currency from Coinbase and immediately selling it at the price listed on Huobi. 

One may wonder, what causes the difference in pricing of the same asset on different exchanges? This could be due to issues like an exchange having a limited supply of a currency and hence selling it at a higher price than other exchanges that have the currency in a higher volume. 

Various crypto arbitrage methods

You can participate in arbitrage trading using either of three ways: spatial, cross-border, and statistical. 

#1.Spatial Arbitrage

This method involves exploiting the imbalance in prices of a cryptocurrency on two exchanges. While Exchange A might have set Bitcoin at $8,000, exchange B might be offering it at $8,400. A trader can buy the crypto from Exchange A and sell it on Exchange B. Such discrepancies are likely to occur due to the unregulated nature of the market. 

#2. Cross-border arbitrage

This method is not so different from spatial arbitrage – the only difference is that the exchanges involved are in different countries. It can be difficult to pull off cross-border arbitrage because it can be difficult to move the assets between such exchanges. 

#3. Statistical Arbitrage

This is the most sophisticated arbitrage of all three. Statistical arbitrage involves mathematical modeling using bots that take advantage of pricing imbalances that can exist in very short amounts of time. 

Why is Crypto Arbitrage Trading Worth it? 

There are several reasons why you might want to dip your toes in crypto arbitrage trading. Let’s look at these:

#1. Fast and easy profits

If your arbitrage trading goes according to plan, it’s a quick way to earn a profit. Since the process depends on speed, it’s easier to make money than with regular trades.

#2. Lots of opportunities

There are practically hundreds of exchanges where you can trade crypto, meaning you have lots of arbitrage opportunities.

#3. The crypto market is still growing and volatile 

The crypto market is still young, and there are no structures in place, meaning most exchanges will not share information and work independently. Most cryptos undergo quick rises and equally quick drops, causing price discrepancies and profitable arbitrage opportunities.

#4. Limited competition

In the crypto space, there’s less competition when you compare with the traditional finance market. Not many traders are looking to explore crypto, much less crypto arbitrage, making the field so much less competitive. 

#5. Guaranteed price disparities

It’s almost a given that a given cryptocurrency will have different prices on different exchanges – with the difference between 3% to 5% and sometimes (though rarely) even up to more than 20%.

#6. Choosing an exchange for crypto arbitrage

Fancy giving crypto arbitrage a trial? The first step is to evaluate the desired exchanges and then registering. Some exchanges require customers to have their account verified, which may take days or weeks, depending on the exchange. Others will require you to deposit money before you can start trading. Still, other exchanges may be less strict in their onboarding process, but most of them will require you to undergo a Know Your Customer (KYC) process. 

What to consider before you sign up on an exchange

  • Fees: When it comes to trading, fees matter, period. Always try and go for low fees. However, don’t sacrifice quality for cheap fees. Always find a balance.
  • Geography: Check whether an exchange or its features are restricted in your jurisdiction. 
  • Reputation: Check what people are saying about the exchange before you put in your money. Search on Google, check various crypto platforms, and so on. The goal is to avoid shady and spammy exchanges. 
  • Withdraw time: An exchange might take hours or days to allow cashouts, so make sure to understand the rules beforehand.
  • Account verification: Some exchanges allow you to withdraw money or provide full access to the markets only after verifying your account. Always confirm the procedure for the exchange before you sign on.
  • Liquidity: Exchanges do not have liquidity in equal measure. If you’re planning on trading large quantities of funds, make sure the exchange has sufficient liquidity.

The Potential Downsides of Arbitrage Trading

Just like with any worthy endeavor, crypto arbitrage trading has its downsides. Let’s see what you need to look out for: 

KYC Restrictions: As we’ve mentioned above, nearly every exchange has KYC regulations in place. You need to observe these regulations, even if they are inconvenient. For instance, you may need to have a bank account in the home jurisdiction of the exchange. Other requirements may include verifying your identity, and so on. Sometimes these procedures can take days before you’re allowed to trade. 

Safety of funds: Since you will be moving funds across several exchanges, you will most likely need to have funds across all of them. Most of the time, such funds are stored in online wallets, making them susceptible to theft. Some lesser-known exchanges could also steal from customers. It would be best if you were extra vigilant with where you sign up for trading. 

Fees: Exchanges usually charge a definite percentage of your profit as fees. Ensure to calculate this before you start celebrating 

The larger the trades, the more the profit: Profits from Bitcoin trading can be very meager when you factor in the processing delays and fees. So to make any substantial profits, you may need to trade more or increase the volume.

Withdrawal limits: Some exchanges impose withdrawal limits once trade volumes cross a certain threshold. This means you will not withdraw all your money within the same day.

Timing: Transactions can take minutes to be completed, depending on the blockchain. This is a very long time in the world of crypto. By the time they are over, you may have lost your potential profit. Indeed, many are times when you may not receive profits as the markets correct themselves, and the profits turn into a loss. You may have bought crypto in one exchange in some cases, but by the time you transfer them to the other, the markets have moved in the opposite direction.

Slow transactions: As crypto increases in popularity, so does trading volumes on crypto exchanges increase. This may make for slower transactions, which is the last thing you want in arbitrage trading. 

Competition: As more people move into crypto trading, the more the competition, and the fewer arbitrage opportunities for everyone

Final Words 

Arbitrage trading is a worthwhile way to make extra money with crypto. As long as you play your cards smart – and quickly – you can make good bucks. But like anything, there are a few downsides. However, you win some and lose some. That’s just life. 

Categories
Crypto Guides

What Is Crypto Arbitrage Trading?

Introduction Arbitrage is known as ARB, and this trading technique is used to facilitate the purchase and sale of similar assets simultaneously. This offers traders the opportunity to gain profits from different price levels. This form of trade acquires profit by leverage market inefficiencies. So if there is a price difference between identical securities in various […]

Introduction Arbitrage is known as ARB, and this trading technique is used to facilitate the purchase and sale of similar assets simultaneously. This offers traders the opportunity to gain profits from different price levels. This form of trade acquires profit by leverage market inefficiencies. So if there is a price difference between identical securities in various […]

Introduction

Arbitrage is known as ARB, and this trading technique is used to facilitate the purchase and sale of similar assets simultaneously. This offers traders the opportunity to gain profits from different price levels. This form of trade acquires profit by leverage market inefficiencies. So if there is a price difference between identical securities in various markets, we get winning opportunities. This is a great method to gain risk-free profit from discrepancies in prices. While this method comes to determining the ideal arbitrage opportunities and implementing it efficiently is quite challenging.

There are two types of crypto arbitrage:

Regular Arbitrage

It refers to purchasing and buying the same digital assets on various exchanges with considerable price differences.

Triangular Arbitrage

It encompasses price differences between three currencies on the same exchange. Traders to leverage the price difference through various conversions.

Although both approaches can be highly profitable, there are more challenges to identify opportunities for triangular arbitrage. Moreover, a large volume of trading on a similar exchange may qualify the trader for competitive fees, resulting in a positive impact on the profits.

Arbitrage Trading in the Crypto Market

While the concept remains the same, it involves different assets. There are hundreds of exchanges operating across the globe that allow people to purchase cryptocurrencies. Cryptocurrency prices are constantly changing across different exchanges. There are many social, political, and economic reasons that contribute to these changes. Arbitrage trading in this landscape is quite straightforward and depends on determining profitable paths.

Identifying the Right Path in Arbitrage Trading Paths

Arbitrage trading is extremely sensitive to time. Variations in the prices are temporary in nature. Potential trading profits generally stand between 1% and 6% per transaction. Therefore, traders need to leverage the right arbitrage software and tools to scan and monitor the market in real-time.

The opportunity for the cryptocurrency is calculated by determining the overlap between the lowest ask prices and the highest bid prices. So when the price of the bid is higher in one exchange than the asking price on another crypto exchange, this is designed as an arbitrage opportunity. Similar to any other method of crypto trading, there are certain risks associated with it. But people have created different strategies to mitigate the risks as much as possible.

Advantages of Crypto Arbitrage Trading

💰 With the right profit, it is a credible way to boost the capital. Similarly, it is all about speed, and you will make money quicker with regular trades.

💰 Most exchanges do not share and operate on their own. Typically, cryptocurrencies experience many rapid rises and sudden falls, resulting in price disparities and profitable arbitrage potentials.

💰 There are over 200 exchanges where you can purchase and sell cryptocurrencies. This means there are tons of profitable arbitrage opportunities.

Contrary to the market speculations, crypto arbitrage has witnessed massive success. It has proven a way to make some extra money without putting much effort. Considering that digital money is not subjected to social influences, and no-one controls them, people are highly inclined towards their potentials to increase in value in the near future.

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Crypto Daily Topic

How to Find and Profit from Arbitrage Opportunities in Crypto-Trading

Arbitrage trading is a widespread concept in the stock market that entails capitalizing price imbalances between markets. Essentially, an investor buys an asset in one market at a lower price and proceeds to sell it in another market where the same asset is priced slightly higher.

Arbitrage_Forex Academy

Arbitrage trading is a widespread concept in the stock market that entails capitalizing price imbalances between markets. Essentially, an investor buys an asset in one market at a lower price and proceeds to sell it in another market where the same asset is priced slightly higher.

Arbitrage trading is a widespread concept in the stock market that entails capitalizing price imbalances between markets. Essentially, an investor buys an asset in one market at a lower price and proceeds to sell it in another market where the same asset is priced slightly higher.

For instance, say a particular international equity trades at $54 per share in one stock exchange. The same equity trades at $54.20 in another market. A smart investor will speedily bulk-buy the equities at the lower price and sell them at a higher price to realize a tidy profit. 

This trading concept can also be replicated in the cryptocurrency market, especially by day-traders who actively monitor the market trends. 

Cryptocurrency Arbitrage Trading 

Arbitrage trading in the digital currency market is somewhat more efficient than the stock market. This is because there exist numerous marketplaces/crypto exchanges, unlike security trading, which is limited to one major exchange in a given geographical area. Moreover, the crypto market is relatively young, which means that most exchanges work independently and do not share information. This has led to price disparities and profitable arbitrage opportunities. 

There are two major arbitrage trading strategies traders can use to make a profit. 

  • Simple Arbitrage 

Simple arbitrage is the most common strategy that is also used in forex trading and sports betting. In cryptocurrency, the strategy involves buying and selling the same digital asset on different exchanges and pocketing the price difference. 

Now, assume that in one of the exchanges, Bitcoin is priced at $6,000 while trading at $8,500 on the other exchange. To efficiently take advantage of this price difference, you need to open a trading account in both exchanges. Then, you will buy Bitcoin at $6,000, transfer the coins to the other exchange and sell them for $8,500. 

Unfortunately, this approach has two major flaws. First, you’ll have to incur transactional costs associated with transferring cryptos from one exchange to the other. Also, transfers between exchanges can take days. Given the volatility of digital currencies, your profits may diminish during this extended transfer period.

To morph up tangible profits, it is recommended to trade large volumes of crypto. This way, your returns are magnified to cover the transfer and delays. 

  • Triangular arbitrage 

Unlike simple arbitrage, triangular arbitrage is more complex as it involves leveraging the price differences among three different cryptocurrencies within one or multiple exchanges. The strategy can be termed as a cycle where you’ll be exchanging your initial crypto for a second and a third one before finally buying back your initial currency within a limited amount of time. So, the first trading action is required if you were to make any profits. 

Here’s how it is done. There are three different assets on one exchange: BTC, ETH, and LTC. Deposit funds in your trading account and buy BTC as your initial crypto. Next, exchange your BTC for the low-priced LTC. Proceed to sell the LTC for ETH and finally trade the ETH back to BTC. Due to the price differences, your initial BTC holdings will have increased to reasonable amounts, which you can sell for fiat currency.

Even without owning BTC as your initial crypto, you can still make a profit by starting with a low priced crypto. In this case, you already hold some USDT in your account and want to buy 1 Bitcoin, which is currently trading at 6527.06 USDT. Instead of buying Bitcoin directly, you can trade your USDT for another currency, say ETH. Now assume that you end up buying ETH for 302.15 USDT for 1 ETH.

Your last step will be to exchange the ETH for at a rate of 1 ETH = 0.04643 BTC, which means that 1 BTC is trading at 21.5378 ETH. At the end of your trade, you’ll have bought 1 BTC for an equivalent of  6507.64USDT ( 21.5378 * 302.15). As such, you’ll have saved about 19.41 USDT, which wouldn’t be the case if you were to buy BTC directly with your USDT. If you cash out the final holdings immediately, you will make 0.3% profit, without considering the withdrawal fees. 

What to Consider before using Arbitrage Trading strategy 

In theory, cryptocurrency arbitrage sounds pretty straightforward to execute successfully. However, as with all trading strategies,  arbitrage trading isn’t immune to risks. So, here are a couple of things to consider doing to mitigate some of the risks: 

  • Make use of Trading bots.

Although manual arbitrage trading is possible, it’s advisable to make use of trading bots to execute trades. This way, you can be sure that you won’t miss any opportunity, especially considering that cryptocurrencies are highly volatile, and prices may move against you if you are not fast enough to execute orders.

Besides, arbitrage trading requires constant monitoring of market movements, which can be tedious. A trading bot, on the other hand, can be configured to run for long hours and execute trades when an opportunity arises. 

  • Keep an Eye on the Fees

There are many costs associated with arbitrage trading that may eventually eat into your profits. Although some expenses such as transaction and withdrawal fees are unavoidable, it helps to review several exchanges and choose one whose costs are more affordable.

Also, be sure to factor in the taxes based on your jurisdiction. In countries where the law recognizes cryptocurrencies as assets, a trader will have to pay tax on every transaction. In this case, you should limit your transaction or rather use simple arbitrage instead of triangular arbitrage to minimize tax charges. 

  • Limit Your Exposure 

As mentioned earlier, arbitrage trading requires making large volumes of trades to realize reasonable profits, especially when the price difference between assets is narrowly spread. However, it’s prudent to only risk the amount you can afford to lose based on your risk tolerance.  

Conclusion

When done correctly, arbitrage trading is an ideal trading strategy for earning quick profits by leveraging the constant price swings of the cryptocurrency market. But remember to take into account the risks involved and ways to mitigate them to increase your returns.