With cryptocurrency trading evolving steadily at a faster rate, markets for trading and exchange of cryptocurrencies are spreading all over the world. As a result, there can be price differences between the various cryptocurrency exchanges out there. Do you know that you can make money by taking advantage of these price differences with something called arbitrage?
Let me ask you: if you had a way of buying a $10,000 worth of Bitcoin on Coinbase and selling it at a higher price on Binance without any fees, delays in time, or international currency exchange rates, how much profit do you think you could make doing so?
My candid answer is that you could have made BANK. How?
Well, there exists a financial tactic in the crypto market that goes by the name arbitrage. It is the practice of buying a cryptocurrency on one exchange where the price is cheap and selling the same immediately on another exchange where the price is high, for a very low-risk profit.
In a nutshell, an arbitrage opportunity comes and goes in a split second; there is no time for waiting. In most cases, arbitraging happens instantaneously. Though, there are many risks and dangers you need to understand before you start trading.
Warning: This guide is for informational purposes only and not to endorse any cryptocurrency, its provider, exchange or trading partner. Cryptocurrencies are highly volatile, complex and involve a lot of risks. They are unpredictable and speculative. Beware!
The Concept of Arbitraging in the Crypto Market
The concept of arbitrage trading in the crypto world is not new. It has existed for many years in the conventional stock exchange, foreign exchanges, and bond markets. Most retail traders no longer bother with arbitrage trading. This is a result of the development of quantitative systems that detect differences in price and perform trading in separate markets.
Nevertheless, there are still many arbitrage opportunities in the world of cryptocurrencies. For instance, a rapid increase in trading volume and poor performances in exchanges lead to price differences.
The opportunity for arbitrage trading arises from the price gap created between bigger exchanges and their smaller counterparts. Larger exchanges with their high liquidity volume set the pace for the price that drives the entire market. Smaller markets in trying to adjust to higher prices set by big exchanges, take time to do that, which is where arbitrage opportunities come in.
3 Amazing Arbitrage Opportunities
Arbitrage is not unique to cryptocurrency alone, it encompasses all areas of trading. The faster rate at which new crypto markets emerge shows that the market is already ripe for various arbitrage opportunities. So, here are three prime opportunities to arbitrage.
1. Pricing Opportunity
The various crypto exchanges list different prices for a particular cryptocurrencies and a critical look at those prices can tell you whether your arbitraging efforts will yield results. For instance, CoinLib’s Best Price Explorer feature is really designed to give you the lists of all the available exchanges for any particular market, from the most expensive to the cheapest.
CoinLib’s feature will help you find out if you can make money off the price differences. But for arbitrage to happen here, you need to consider these four factors:
- The actual fees for trading a cryptocoin.
- The fees for depositing and withdrawing a cryptocoin.
- The blockchain network fees.
- The time it takes to move your cryptocoins from one exchange to another.
2. Geographical Opportunity
The Kimchi Premium saw the price of Bitcoin in South Korea increase to more than half of world prices at the beginning of 2018. The reality is that the price of cryptocurrencies in different countries can change significantly based on demand and supply.
So, if you can find out how to stay within the boundaries of local regulations in countries where the price of cryptocurrencies is either high or low, then you are at an advantage. Though, withdrawing your money internationally may pose a greater challenge.
3. Listing Arbitrage Opportunity
This opportunity might be more beneficial to new investors. Any new cryptocoin listed on big exchanges tend to have opportunities for lucrative price arbitrage as a result of increased buying demand.
How to Participate in Cryptocurrency Arbitrage – The Strategies
The best approach to cryptocurrency arbitrage is to do everything manually. The basic step is this: you track the markets for differences in price, place your trades, and transfer the funds to your account accordingly. On the other hand, online cryptocurrency arbitrage bots can help you monitor price movements and differences. In the same vein, online/mobile trading applications can also aid in the market monitoring process.
Remember, the cryptocurrency market is booming. Hedge funds are now pitching their tents in the crypto ecosystem for crypto arbitrage funds.
It is worth mentioning here that there are many strategies arbitrage traders can use to make money. They are the following:
Simple Arbitrage – This is the buying and selling of the same cryptocoin immediately on different exchanges.
Convergence Arbitrage – This strategy entails purchasing a cryptocoin on an exchange where the it is really undervalued. Then, you short-sell the same cryptocoin on another exchange where it is significantly overvalued. You can make your money when these two different prices meet at the central point. This is making a profit from the amount of convergence.
Triangular Arbitrage – Here you take advantage of the price differences between three cryptocurrencies to make your money. For example, you buy Bitcoin in U.S. dollars, sell it to earn in EURO, and then exchange the EURO crypto asset back to USD.
Cryptocurrency arbitrage is a reality. You should have gotten the whole gist about the concept by now. Taking advantage of this investment opportunity, though, entails a high level of risk based on the speculative nature of cryptocoin listings. So, if you decide to try it out by yourself and at your own risk, then get your act together and do the due diligence by implementing the contents of this guide.
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any content/information before relying on them. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct your thorough research before investing in any cryptocurrency and read our full disclaimer.
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