What is Arbitrage?
Arbitrage is a strategy of simultaneously buying and selling an asset at a different price in different markets. These difference in the price of an asset between two different markets leads to an arbitrage opportunity.
Let’s understand it in a simple way, arbitrage means purchasing an asset in the market at a lower price and simultaneously selling the same product or asset at a high price in the market.
Cryptocurrency Arbitrage Trading Strategies
2020 was the year that the future of cryptocurrency began to make the headlines. It was the talk of the town and various platforms started to emerge to further explore where digital dollars could take us. Online trading started to become popular and people were rushing to try the different platforms available.
Since then, the value of the cryptocurrency has just continued to skyrocket in the stock market and it is the best time to join in and know more about this growing online market. In this article, we will be discussing all crypto arbitrage trading and the different trading methods you can use.
Also read: Types of Trading Strategies
The Basics
Since everything has shifted online, Crypto Arbitrage Trading has been one of the strategies that people shifted to be able to stay afloat in a time where businesses had to shut down. We may be familiar with these terms but it does make one wonder, “How do they do it?”
People profit through this method of trading by buying digital currency for a low price and simultaneously selling it at a higher rate. Crypto arbitrage traders, also known as arbitrageurs, are experienced investors that take advantage of the difference in asset prices in different exchanges. Having heard all this, it is not uncommon for people to wonder where all this money comes from.
For example, bitcoin comes from bitcoin. There are “miners” of bitcoin, when they are able to verify about 1 megabyte of bitcoin transactions, they get the chance to earn bitcoin. Profit from mining is not guaranteed however, there is stiff competition. The easier way to access cryptocurrency is by trading in fiat money, that is the $20 in your pocket or e-wallet.
The last basic thing you need to know is the “legality” of cryptocurrency. Because of the value and the way cryptocurrency is obtained, it can pose a threat to the local currency. There are certain countries like Bolivia, where criminal practices are largely carried out through cryptocurrency. Be sure to check the laws in the area that you live in to avoid breaking any laws.
Simple Arbitrage
In its most primitive form, simple arbitrage takes form when a trader purchases digital currency from one market and immediately sells it to another. Simple Arbitrage trading often focuses on making numerous quick transactions accumulating many small wins to turn into a profit. Due to the nature of this technique, those who are adept at it can easily identify arbitrage opportunities over short periods of time.
Trading with simple arbitrage, however, is not risk-free. Even In a matter of seconds, prices can change drastically. Small distractions or bad internet connection along with mediocre decision making carry the potential to make you lose money.
An example of simple arbitrage is buying assets from a farm and selling them in a supermarket. In cryptocurrency, these are doing very quickly, capitalizing on the differences of prices of goods in various platforms.
Triangular Arbitrage
Keep in mind the basics of the previous method and then change the number of currencies involved into three. These three currencies are simultaneously flowing as one exchange with a system that starts and ends with the first asset bought during this cycle.
To be more specific, the steps for this method starts with buying an asset, and then you’ll find yourself trading in with a second currency that will be the bridge to connecting the first asset with the next one; and then trade with a third currency that will, in this part of the cycle, be the bridge for both the first and second asset.
For a more specific description, imagine the three currencies like Bitcoin, Ethereum, and Litecoin. Say that you bought your first asset from Bitcoin and you followed it by trading with Litecoin – which then becomes the link for the Bitcoin and the following currency after this second currency. Then, you trade with Ethereum who, in turn, becomes the bridge for Bitcoin and Litecoin. Other than that, from Ethereum, you’ll find yourself converting it back for the original asset.
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Automated Arbitrage
Remember that it is essential to be keeping track of the cryptocurrency market to know how your assets are doing, as well as, what else could you profit from this time around. Doing all that manually isn’t possible because that’s going to have you up and around 24/7 so, what various companies have taken to developing crypto bots that would aid traders.
3Commas, Napbots, and HaasOnline are a few of the well-known bots who were designed to be alert in the comings and goings of the crypto market, to analyze a mass of data, develop and suggest better trading methods, and make as much exchange as possible for their traders. This kind of system makes this method one of the best out of the four in this list, because having these automated trading bots help the traders breathe a little bit better since they don’t need to carry all the work of keeping their assets afloat on their own.
Statistical Arbitrage
Among the other methods that we have made mention, statistical arbitrage would probably be the most difficult of all because of its complexity. It requires an analysis for market statistics that one would need to have background knowledge about and the simultaneous opening of multiple orders. You would need to make use of large portfolios that are traded in a brief moment.
This type of method allocates stocks a ranking through desirability and creates a portfolio to reduce risks. This relies heavily on computer analysis to precisely determine individually unique data.
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Takeaway
If anything has been proven for the last 5 years, it’s that there is big money to be made in trading cryptocurrency. Arbitrage is an advantage. If you want to enter this new-world market, it is best to have all the tools under your belt and now that you know how to make profits from arbitrage, it definitely gives you an edge. So grab your spot and happy trading!
