Arbitrage Trading In The Cryptocurrency Market
Understanding arbitrage trading possibilities and opportunities in the crypto world.
The crypto market, as in the stock market, exhibit price imbalances across different cryptocurrency exchanges that can be an opportunity to gain profit from. This market imperfection is essential in executing an arbitrage in which an astute trader with a trained eye can spot, exploit, and decide upon in a split of a second. But it takes a comprehensive understanding of how the cryptocurrency market as a whole breathes and operates to be able to make a successful arbitrage judgment call.
What is Arbitrage Trading?
Price fluctuations frequently occur in an often-volatile crypto market. Another is the difficulty in synchronizing the same prices in all exchanges. Your cryptocurrency, for example, Bitcoin, can register at different prices when comparing two exchanges. Therefore, you buy the lower-priced Bitcoin from one exchange and sell it to the higher-priced Bitcoin exchange. You can also buy in large quantities which can give you handsome gains once sold in the market at a higher price. This is essentially the principle of arbitrage.
Two major kinds of crypto arbitrage exist. Let us explore them one at a time…
1. Inter-Exchange Arbitrage — Arbitrage between exchanges.
This is, obviously, the simplest kind of arbitrage. As we have already mentioned, a single coin can be priced differently between two exchanges. You can earn a profit by buying from the exchange that sells the coin at a low price and then selling it at the other exchange that buys the same coin at a higher price. By analyzing the market price, if Bitcoin, for example, is being traded from $10,152 to $10,865, you start by scouting for the crypto exchange that sells the $10,152 Bitcoin and buys it, then sell it to the exchange that buys the Bitcoin at $10, 865. You earn a profit margin of $713.
You can identify opportunities in arbitrage between exchanges by taking into consideration the following factors:
a. Listings. The cryptocurrency being listed on a major crypto exchange can affect its price difference from a lesser-known one.
b. Liquidity. Market price fluctuations tend to be steadier on more established crypto exchanges than less popular, smaller, and newer crypto exchanges. Liquidity also involves the market volumes of the different exchanges and the supply and demand from each that greatly affects market price volatility.
c. Geography. Trading intensity usually heightens or drops at certain times of the day. Time zones can affect market prices depending on the crypto demand in that region.
Once you have decided to try crypto arbitrage, you need to register on both the exchanges you chose. Then you have to deposit fiat currency on one exchange and buy Bitcoins and cryptocurrencies you intend to sell. Transfer what you bought to the other exchange, then sell your cryptocurrency for fiat, and then you can withdraw your profit. Engaging in arbitrage means paying the necessary fees for trading and withdrawals, which ranges from 5%-15%. Completing the arbitrage process usually will take you up to five days, which is critical due to the highly volatile characteristic of the crypto market. In such a case, your arbitrage venture for profit-making might fall short of expectations or simply shoot beyond.
Since the trading fees involved and the amount of time spent in arbitrage can make or break your chances for profitability, it is best to deposit fiat and cryptocurrencies on both exchanges of choice. This method will reduce the amount of waiting time during fund transfers, thereby increasing your arbitrage opportunities. But remember that they will still charge you with withdrawal fees each time you intend to cash out on your gains.
2. Intra-Exchange Arbitrage — Arbitrage within a single exchange.
Intra-exchange arbitrage makes use of one single exchange, as with forex trading. It is close to a triangular or cross-currency arbitrage. To make a profit, you begin by opening an account and depositing fiat on an exchange of your choice and buying a selected cryptocurrency and selling it in exchange for another cryptocurrency, which you sell in exchange for fiat. That’s the time you withdraw your profits. You can repeat the process for more rewards or by buying and selling different cryptocurrencies and, thereby, engage in polygonal arbitrage. But then, engaging in this type of arbitrage can decrease your chances of yielding high profits. It is best to first study and measure your success via the risk and reward equation. The advantage of intra-exchange type of arbitrage is the elimination of withdrawal fees. Only that, profitability is not that rewarding compared to two-exchange arbitrage.
Few Things to Remember
Always do the math before going through the arbitrage process. Transaction fees and withdrawal fees exist whenever there are engagements. Be sure that what is left is still substantial to be called a profit. The Anti-Money Laundering and Know-Your-Client procedures can strain your transactions on cross-border arbitrage. Prepare the necessary documents beforehand so as not to be delayed by stringent verification requirements. Time is of the essence every time withdrawal execution is concerned. The volatility of the crypto market calls for quick fund transfers or else the opportunity is gone, or worse, your capital can be wiped out. There are a lot of exchanges in the crypto market, but that does not mean all are reliable. Some sell below the market rate that could be enticing to pursue, but withdrawal processes are hellishly slow, or security is shallow. Proceed with calculated caution.
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