Arbitrage possibilities are becoming more common in the cryptocurrency space, and they provide traders with a compelling method to increase their profits. However, cryptocurrency arbitrage, like any other trading method, has its benefits and drawbacks.
The best techniques to engage in crypto arbitrage will be discussed in this article. But first, let’s take a look at what arbitrage is and how it works.
What Is Arbitrage?
Arbitrage, according to Investopedia, “describes the act of buying a security in one market and simultaneously selling it at a higher price in another market” to profit from the price difference.
What Is Crypto Arbitrage?
The process of capitalizing on the low correlation in the values of crypto assets across two or more exchanges is known as crypto arbitrage. For instance, if Binance sells Bitcoin for $53,000 and Coinbase sells it for $53,400, an arbitrageur can buy Bitcoin on Binance, transfer it to Coinbase, and sell it for a higher price.
Is Crypto Arbitrage Legal?
Taking advantage of market inefficiencies is completely lawful. Crypto arbitrage is, in fact, critical to the crypto market’s overall homogeneity. When there are price differences across various exchanges, crypto arbitrageurs’ trading efforts will eventually drive the values of the digital asset to converge across exchanges.
Of course, crypto arbitrage is only possible with decentralized currencies of which we expect to engage with smart contracts on public and permissionless networks.
Unlike CBDCs (controlled by central banks), decentralized currencies often provide a medium for moving value instantaneously between digital wallets and exchanges. In case you are wondering what is CBDC, it is an electronic form of a central bank’s money you can use to make digital payments and store value. Because they are usually issued on private ledgers, they create no room for crypto arbitrage.
How to Optimize Your Crypto Arbitrage Strategy?
When it comes to crypto arbitrage, the first thing to remember is that you’re dealing with a highly volatile market. As a result, you should do all in your power to increase the speed of your trades before your profit window closes. Stick to high liquidity exchanges that can rapidly match and execute your orders to maximize speed. Low-volume exchanges, on the other hand, may take several minutes to match trades.
What is a Crypto Arbitrage Bot?
Bots built to automate and optimize crypto arbitrage trading are also a viable solution. Crypto arbitrageurs should use these tools in conjunction with market inefficiency trackers.
A crypto arbitrage bot is a computer software that checks prices on multiple exchanges and executes automated trades to profit from price differences.
What Are the Different Types of Crypto Arbitrage?
There are several types of arbitrage activity. Here, we will highlight the most popular types amongst crypto traders:
Deterministic Arbitrage
This is the most basic form of arbitrage. It entails traders purchasing and selling a digital asset on two exchanges at the same time to profit from market inefficiencies.
Triangular Arbitrage
There’s also a chance to profit from the uncorrelated pricing of three cryptocurrency pairs on an exchange, particularly if one of the cryptocurrencies is underpriced on the platform at the time.
Decentralized Arbitrage
Arbitrageurs can buy and sell pooled digital assets that are either undervalued or overvalued on these various platforms. These efforts, like those of centralized crypto exchanges, eventually lead to price homogeneity among DEXs.
Statistical Arbitrage
This involves leveraging algorithms and quantitative data models to make profits from large-scale arbitrage possibilities. This process is automated, so it is possible for an arbitrageur to make hundreds of deals in a matter of minutes, thereby significantly increasing profit potential.
Pros and Cons of Crypto Arbitrage
Before you jump to the conclusion that crypto arbitrage is the best way to make quick money from crypto, it’s important that you are aware of some of its pros and cons.
Pros
- It is low-risk: Compared to long-term investments, crypto arbitrage comes with very low risk.
- It doesn’t rely on a bull or bear market: Regardless of the direction of the market, you can make money with crypto arbitrage. Keep in mind, however that massive bull markets usually come with arbitrage opportunities.
Cons
- Transaction fees can affect your profit: Crypto exchanges usually make money by collecting transaction fees on every transaction. If an exchange has a very high transaction fee, this can affect the profit of an arbitrage trader.
- You need to make your trades quickly: Time is everything when making arbitrage trades. You need the latest technology to make trades as fast as possible for you to make your desired profits.
Conclusion
Decentralized currencies makes bilateral OTC crypto trading possible and also provides an avenue to take advantage of arbitrage opportunitie
Following the basic crypto arbitrage best practices and procedures outlined above should help you take advantage of the numerous arbitrage opportunities available in the crypto market today.
This article is not financial or investment advice. Before investing in cryptocurrencies, always do your own research (DYOR).
