For traders who are looking to start arbitrage trading crypto, there are a few key differences between arbitrage trading in different markets. However, the basic concept is the same. Being successful involves finding low prices for an asset or group of assets and selling them for a higher price to take a profit.
Arbitrage is a trading strategy in which an asset is purchased in one market and sold immediately in another market at a higher price, exploiting the price difference to turn a profit.
Different exchanges have various withdrawal waiting times and fees, so it’s nearly impossible to catch crypto arbitrage opportunities by using the same funds twice. A more practical way is to hold an equivalent amount of funds on two different crypto trading platforms. But not every digital assets is created equal when it comes to arbitrage. For instance, Bitcoin has become very widely traded, with trading volume growing from an average of $5-$10 million per day in 2017 to $100-$200 million per day. That’s resulted in fewer Bitcoin arbitrage opportunities.
But there are other ways to get involved in crypto arbitrage besides investing in bitcoin.
• Target less-popular cryptocurrencies. Investors can find bigger price spreads for the same digital assets among less-popular, less-frequently traded tokens (such as Ripple, Stellar, and IOTA for example). But it should be mentioned that these cryptocurrencies are prone to rapid price fluctuations, because they’re less popular. This volatility can be considered as good or bad news, but it adds another level of risk to an arbitrage strategy.
• Take advantage of new software. Some bots are able to trade hundreds of digital assets at once in order to optimize them for each possible scenario. Despite the fact that many advanced statistical arbitrage trading crypto bots charge fees either monthly or per trade, there are also free options available.
- Explore “triangular arbitrage.” This strategy takes advantage of pricing inefficiencies among cryptocurrencies on the same exchange, or across exchanges. In other words, with this strategy an investor starts with one cryptocurrency and then trades it for another cryptocurrency, that is undervalued relative to the first crypto, on the same exchange. After that, The investor trades that second cryptocurrency for a third cryptocurrency which is relatively overvalued when compared with the first. Finally, the investor would trade that third cryptocurrency for the first crypto, completing the circuit with a profit .
- Decentralized Finance Arbitrage with Yield Farming- Various platforms enable users to find automatically arbitrage opportunities on DeFi lending protocols. DeFi arbitrage is quite risky as smart contracts often have bugs either by design or by accident.
Some tips to avoid risks
- Check the Coin Name & Ticker
- Compare Exchange Fees + Understand Asset Management
- Don’t Buy Into Promises Of Unreal Returns
- Ensure The Target Trading Pair/ Market Has Adequate Liquidity
Cryptocurrency is complicated, and arbitrage strategies can be even more complex. But the practice is legal, and has the potential to yield high rewards while also exposing an investor to high risk.
As with any investment strategy, it is important for investors to do their own research when exploring crypto arbitrage, including looking at different, lesser-known cryptocurrencies, and available software to track cryptocurrency exchanges in real time.
