Beginner’s guide to Arbitrage trading in crypto

Crypto trading is generally dubbed as risky and for all the right reasons. When an asset is ruled by extreme volatility, it does pose a bunch of wild risks. But, of course, we can’t deny the astronomical profits crypto trades might bring if the stars work in your Favour. However, if you want to start small and in a low-risk zone, it’s better not to begin with high-profit yet high-risk trading strategies like margin trading. In that case, arbitrage trade crypto could be the most potential crypto trading strategy for you. Read more at place link.

What is arbitrage trading in crypto?

Arbitrage trading is nothing new in the trading or capital market- rather it has always been a highly adopted trading strategy in the commodity, stock, and traditional currency market. Much to the delight of crypto traders, the crypto industry too has widely adopted arbitrage trade crypto.

Arbitrage trading can be defined as a trading strategy that capitalizes on the price gaps of the same asset in, say two, or multiple markets. When it comes to arbitrage trade crypto, “market”, refers to crypto exchanges- the platforms where crypto assets are traded. In this case, you buy a crypto asset in one market and then sell the same quickly in another if the price seems to be higher on the second platform. There is a specific term for traders who engage in arbitrage trade crypto or any trading vehicle- “Arbitrageurs”.

Let’s define arbitrage trade crypto with an easy example.

Let’s say, Bitcoin is trading at $24,000 at one exchange. But, after a deeper research, you find that the same asset is trading at $24,050 at another exchange. So, now you just buy BTC from the first  exchange and then sell it to the second one simultaneously to enjoy a profit worth 50 cents.

How much profit from arbitrage trading?

Well, one of the best incidents of arbitrage trade crypto happened in 2017.

Back then, BTC was selling at $16,979 at one exchange and at a surprising $17,212 at another exchange. Investors and traders who opted for arbitrage trade crypto that time made a whopping profit of $233 on every Bitcoin.

But, in general, arbitrage trade crypto doesn’t always offer such high profits. As you will be buying and selling almost simultaneously, you might not be able to find much difference in prices. In fact, any post on arbitrage trade crypto will tell you that the trade is mostly about making profits from small price gaps in the price of an asset across various exchanges.

But one thing, arbitrage trade crypto might bring in a  slightly different circumstance than arbitrage trading in other markets. As you know, the crypto market is still non-regulated which results in extreme volatility and fast price fluctuations. So, the price gaps in arbitrage trade crypto could be slightly more than that of arbitrage trading- and simultaneously, the rate of profit too could be little more at times.

Benefits of arbitrage trading in crypto


Correcting market inefficiency

It’s to note here that arbitrage trade crypto- or arbitrage trade in any market- capitalizes on market inefficiency. The term “market inefficiency” refers to a situation where an asset, say BTC, isn’t traded at its fair or true value. Market inefficiency is more prevalent especially in markets like crypto that’s defined by extreme volatility.

It should be noted that while  arbitrage trade crypto cashes in on market inefficiency, the traders also help to make the trading market a little more efficient.

As the arbitrage trade crypto traders purchase and sell off, it helps to narrow down the price gaps in between the similar or same assets. As a result, high-priced assets get sold off while the lower-priced ones  tend to bid up. This way, the arbitrage trade crypto helps to resolve the “inefficiency” factor by providing increased liquidity in the market.

Easy trading

Another benefit of arbitrage trade crypto is that it’s a simple and convenient process. You won’t have to go through the whole set of technical analysis to find out the future price of the assets. So, arbitrage trade crypto is comparatively, easier and straightforward, especially for the beginner traders.

Arbitrage crypto trading strategies

When it comes to arbitrage trade crypto strategies, there are three most common strategies to choose from-

Cross-exchange

In this arbitrage trade crypto, traders try to make some profit by purchasing a crypto asset, say BTC or ETH, in one crypto exchange and then by selling it off on another crypto exchange. This is the most basic arbitrage trade crypto.

Spatial arbitrage

Essentially, this arbitrage trade crypto strategy is the same as the one mentioned above. But, there is just one minor difference- in the case of spatial strategy, you trade on crypto exchanges situated in separate geographical regions. So, say, you buy BTC from an exchange located in the USA. But, when you have to sell it for arbitrage trading, you sell it on a crypto exchange situated in Germany.

Triangular arbitrage

Now, this arbitrage trade crypto is slightly more complicated than regular arbitrage trading as it involves multiple currencies- precisely three different cryptocurrencies.

So, let’s stay, you begin your arbitrage trading with Bitcoin. Now, you will trade it with another crypto asset which seems to be undervalued in comparison to BTC at the moment. The next step is to sell that second asset for a 3rd crypto that seems to be comparatively overvalued than BTC. In the final phase, you will trade this 3rd asset for BTC, thereby completing the cycle.

Final words

Well, arbitrage trade crypto might be a comparatively lower-risk and easier trade than other crypto trading strategies but you should understand that it involves an extremely laborious process. You will have to stay updated about constant price  changes of your chosen asset, and that too across multiple exchanges. But, the good thing is, today you have software applications or tools that are designed to do the legwork for you. These apps track the price changes on behalf of the traders so that you can focus more on the trade and profit.

Priya S

I am a professional writer and blogger. I’m researching and writing about innovation, Entertainment, technology, business, and the latest digital marketing trends.