What is Crypto Arbitrage
Arbitrage opportunities have long existed for traditional assets such as stocks, bonds, and foreign currencies.
However, finding them typically requires sophisticated systems, which are out of the reach of most investors.
But crypto Exchange arbitrage is the exception to the rule.
What drives this accessibility is the very nature of cryptocurrency exchanges.
There are many of these exchanges all over the world.
Moreover, they vary greatly in trading volume, available liquidity, and prices.
Often, the large cryptocurrency exchanges, which generally have higher liquidity than smaller exchanges, experience a rapid surge in trading that dramatically affects prices.
But it also often takes some time before these price changes affect the prices at the smaller exchanges.
This is when the opportunity for arbitrage arisesfor those who can spot the differences in prices.
In general, cryptocurrency prices are lower at larger exchanges.
This is because of the higher liquidity and higher trading volumes.
So, one common means of crypto arbitrage is buying currency from one of the larger exchanges and selling it at the smaller ones.
But during the surging of prices, opportunities for crypto arbitrage also exist in the opposite direction as well.
This is because the prices at the smaller exchanges usually do not adjust as fast as they do at the larger ones.
The main idea here is simple:
You try to benefit from price differences for the same asset on different markets or exchanges
If you need a definition, Investopedia describes arbitrage as:
“The simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.”
In other words:
Buy low in one Exchange and sell high in another one!
Cryptocurrency price differentials can be substantial across exchanges. It presents traders with a legit opportunity to take advantage of price inconsistencies.
There are 3 distinct methods of crypto arbitrage:
As the name implies, this is the easiest form of crypto arbitrage and one of the most common.
You buy a particular cryptocurrency, such as Bitcoin, on one exchange at a low price and you sell the same cryptocurrency for a higher price on a different exchange.
- Triangular Arbitrage
Triangular arbitrage is a little more complicated than simple arbitrage.
Instead of buying and selling a single cryptocurrency on different exchanges, you buy three separate digital currencies, taking advantage of discrepancies that exist between certain trading pairs.
For example, you may find it advantageous to trade XRP into Bitcoin on a particular exchange if you first trade your Bitcoin into Ethereum on one exchange and your Ethereum into XRP on yet another exchange.
- Convergence Arbitrage
In convergence arbitrage, instead of buying and selling a cryptocurrency, you buy currency at one exchange where it is selling lower than the market value.
You need to sell it at the second exchange where it is selling higher than the market value. You profit when the prices meet.
While all 3 approaches are legit can be profitable.
It might be more challenging to discover opportunities for triangular arbitrage within the exchange.
Conversely, large volume trading on the same exchange might qualify you for attractive fee discounts that can have a positive impact on your profits.
For the sake of simplicity, we will use examples of regular arbitrage below.
Why Crypto Arbitrage is SO Lucrative
There are many reasons why you might want to try crypto arbitrage, including:
If everything goes according to plan, it’s a plausible way to increase your capital.
At the same time, it’s all about speedso you might make money faster than with regular trades.
A wide range of opportunities.
There are more than 200 exchangeswhere you can buy and sell cryptocurrencies, which means a plethora of profitable arbitrage opportunities.
Cryptocurrency markets are still young and volatile.
Hence, most exchanges don’t share information and work on their own.
Most cryptocurrencies experience many quick rises and sharp drops, which lead to price disparities and profitable arbitrage opportunities.
There is less competition compared with traditional markets.
Not every arbitrage trader is willing to give crypto a chance, which makes crypto space less competitive.
Cryptocurrency price differences tend to range from 3% to 5%.
Sometimes reach up to 30-50% (in extreme cases).
Needless to say, cryptocurrency arbitrage works best when you trade high amounts.
Lesser amounts may result in minuscule earnings that may not be worthy of your time.
Indeed, cryptocurrency arbitrage can be a highly lucrative activity.
But only if you do your research, estimations, and calculations.
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