Arbitrage is a unique method to make money based on the price difference of the same crypto coin trading on different exchanges. With crypto coins experiencing erratic price movements, this might be one of the most effective trading strategies in the cryptocurrency markets.
Different Types of Arbitrage
There exist various strategies, which you can use as an arbitrage trader to make a profit. These are:
- Simple Arbitrage
This is the simplest arbitrage strategy. It involves buying a coin such as ETH on one exchange and immediately selling it on another one. As discussed above, many different exchanges support Ethereum, but the trading price of ETH varies from exchange to exchange for various reasons.
- Triangular Arbitrage
This is a slightly more complex strategy and entails three different assets. For instance, you can purchase BTC in USD, use the BTC to buy ETH, and then sell your ETH for USD. For somebody new to trading and cryptocurrency, this might not be the smartest way to enter the markets. Simple Arbitrage would be easier for you to understand. Triangular Arbitrage tends to be popular among more experienced traders.
- Convergence Arbitrage
This strategy entails buying a coin, which is undervalued on an exchange, and then short-selling the coin on another exchange where its price is overvalued. When the prices at the two exchanges meet in the middle, you will be able to make a profit on the convergence amount.
How It Works
Arbitrage is made possible because different exchanges have different trading volumes. On major exchanges with high volumes, the liquidity is higher, which usually makes the prices lower on such an exchange. On smaller exchanges where a given coin is in short supply, its price is likely to be slightly higher. You only need to buy from the larger exchange and immediately sell on the smaller one to make a quick profit. One of the biggest arbitrage opportunities came in January 2018 when a low supply of BTC in South Korean exchanges saw prices rise 50% higher on other exchanges globally.
The Simplest Way to Do It
Many people believe that doing this process manually is the easiest. What they forget is some of the fundamentals involved. Someone that wants to do arbitrage manually will have to pay close attention to trading fees. They also will have to take the time to sign up at various exchanges to ensure you have a valid account. This can get tricky at times, especially since many exchanges are now forced to go through KYC ( know your customer ) protocol which can take multiple days to be approved. Many people have also found value in the automation process through “bots”. These arbitrage bots essentially do all the work without some of the hassles explained above through manual techniques. It’s very important to do your research before engaging in any “trading bots.” Some have been great products, while others have turned out to be scams. The evolution of arbitrage software has automated the process of manual trading, taking the experience to a whole different level.
Some Popular Arbitrage Crypto Bots
3Commas is an arbitrage bot that seems to make a lot of headlines. Their value proposition is giving you the ability to create your own bot, or simply copying profitable bots from other users. According to their website, they have 60,000 users and the average profit per user sits at 15%.
Gunbot also makes headlines for its privacy structure. According to Gunbots website, they state that no data is collected for user trades. In terms of innovating and creating a better user experience, Gunbot leans on their community for website enhancements. They mention that “nowadays the software is almost completely based on community input.”
Institutional Investors are entering the Arbitrage Space
Institutional investors are recognizing the potential that crypto arbitrage holds. For instance, Kit Trading, a hedge fund based in Singapore, joined the crypto arbitrage space in 2018.
The Benefits of Crypto Arbitrage
May Make Money Fast
This strategy is all about speed. As a result, you could potentially make money faster than regular strategies that involve buying and holding onto the coins.
Many Opportunities
There are currently over 200 crypto exchanges in the world. Most of these exchanges allow traders from any part of the world to trade.
The Crypto Market is Still Young
Most crypto exchanges today do not have a mechanism to share information. As a result, various exchanges can experience sharp price changes that are independent of each other.
Summary
It is worth noting that the crypto market is quite volatile. As a result, you should not risk more money than you can afford to lose. Arbitrage can be an interesting way to enter the cryptocurrency markets if you value short-term trading. With the volatility that exists in cryptocurrency, it has helped this mechanism come to fruition over the years.
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