A Brief Look at Cryptocurrency Arbitrage Trading
As a crypto trader, surely your mind is constantly searching for ways of staying on top of the “game” and getting an edge in your quest to gain larger and larger profits. As a crypto trader, there are various interesting and more or less risky methods of trading you can employ, especially since cryptos are way out of government’s controls, there are a lot of price differences across various exchanges.
One of these methods is called cryptocurrency arbitrage trading and is generally regarded as a very straightforward and low-risk strategy. In this article we will cover various aspects of this interesting trading method such as what is crypto arbitrage trading, how does it work, what are some of the most typical strategy basics, and what are the associated risks.
What is crypto arbitrage trading?
According to Wikipedia, in typical economic and finance fields, arbitrage is “the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.”
To put it as simple as possible, arbitrage implies you’re buying a particular coin from an exchange A when it’s cheaper than on exchange B, and then sell it on B, and benefiting from the remaining difference. When it comes to crypto arbitrage trading, it can be argued that it works the same as a stock arbitrage. However, there are a few discrepancies that you should be aware of before committing to this trading method.
Since the crypto market is incredibly volatile, the sudden changes can cause bit disparities in price across exchanges. Another aspect worth considering is the fact that since most crypto exchanges are not regulated, the price disparities are only amplified. These price disparities in cryptocurrency exchange prices for a particular coin can be triggered by a multitude of reasons such as low liquidity levels. Finally, contrary to typical arbitrage, cryptocurrency arbitrage trading is a lot more dependent on technology and software.
How to make the most out of crypto arbitrage trading?
There are two ways to proceed with crypto arbitrage trading: you can either opt for the manual version, or you can employ the services of a specialized cryptocurrency arbitrage software or crypto arbitrage bot.
The first version implies a trade by having to manually monitor the price of an asset across a broad spectrum of exchanges. Even though some exchanges offer their users various price tracking tools, it’s easy to see why this method is not exactly practical. This method would require you to be ready at all times to proceed with the arbitrage once a disparity is revealed. One of the most important aspects to keep in mind is the fact that speed is of the utmost importance for a successful arbitrage procedure.
That is just one of the reasons to opt for arbitrage trading with the help of a bot. Arbitrage trading bots are also more reliable than you can ever be, as they are not affected by the same physiological needs as human traders. There are some bots who can keep track of the price of multiple exchanges, but most come with support for only one. However, besides choosing a bot, it’s also important to remember that it needs to be configured properly in order to perform as intended. There’s also a bit of maintenance work involved. For example, you will be required to manually re-balance the wallet.
What about the risks?
Without a doubt, arbitrage cryptocurrency trading limits the downside risks, and it can be a successful method of trading if one has the experience, patience, and inspiration for it. However, there are some inherited risks.
One of the main issues to be aware of is the price decline risk. If, for example, the market’s current state is “bearish,” it might not be worth getting into arbitrage trading since your trading funds will decline in value over time. In short, the profits you generate in this situation may not be enough to actually make a profit (or even cover your loses). This can be somewhat countered by employing a trading method called margin trading, which is not exactly risk-free either. Quite the contrary.
Then there are a lot of risks related to the crypto market’s volatility which implies a lot of price movement. During a bull market, when exchanges experience low volumes, it’s advisable to only sell on one exchange while only buying on the other exchange. The worst case scenario is that while moving your funds across the blockchain and they become unavailable, the initial prices might have already changed drastically. To lower the movement risk as much as possible, you should only use trustworthy exchanges with very good, 24/7 customer support.
There’s also an execution risk associated with crypto arbitrage trading. This risk stems from the possibility of not being able to fulfill the trade from one exchange to another because someone else was faster than you. This is usually a risk associated with manual trading.
Before we conclude, it’s important to note that the amount of arbitrage you can perform heavily depends on the market situation, even with bots. Crypto arbitrage trading is without a must-try method for anyone who’s looking to get into crypto trading. We hope that this article has helped you shed some light on the basics of crypto arbitrage trading, and, as with all trading techniques, start small, and if you’re good at it, go on from there.