A brief introduction about cryptocurrency arbitrage
People across the globe trade cryptocurrencies worth billions of dollars daily. Since no centralized entity keeps track of their prices, each exchange displays different prices for the same coin. Crypto exchanges keep an order book where they base the price of a particular crypto.
Traders leverage this price difference to earn profits. It is known as arbitrage.
What is crypto arbitrage?
In simplest terms, arbitrage is a trading technique that involves buying crypto from one exchange then selling it on another for a better price and profiting from the difference.
For example, if Binance sells Ethereum for $3,000 and Coinbase sells Ethereum for $3,100, a trader can buy ETH on Binance, then sell it at Coinbase for a higher price.
Arbitrage has been around since stocks and bonds. Since stock prices are regulated, it is not profitable. Like any other trading approach, arbitrage has its advantages and disadvantages.
How does arbitrage occur?
A pricing difference can occur due to various circumstances. One of the most significant factors is the trading volume and the size of an exchange.
Small exchanges have little liquidity, which can lead to high prices. Large exchanges have high trading volumes, which can lead to lower prices.
Other factors resulting in arbitrage can be:
Type of exchange
Cryptocurrency exchanges target different categories of investors according to demographics and interests.
Deposit and withdrawal times
Exchanges with slow response times take longer to keep up with the overall market rates. Traders can use the time difference to create an arbitrage opportunity.
Pros of crypto arbitrage
Traders can perform crypto arbitrage as soon as the transactions are complete. It usually takes an hour or less. It is faster than the traditional trading method of purchasing and holding cryptocurrencies for a long time.
Wide range of opportunities
There are many cryptocurrency exchanges available today, resulting in various opportunities.
The cryptocurrency market is still growing.
Cryptocurrency has yet to be recognized by the general public. It is still in the early stages of development. As a result, there are many inconsistencies, inefficiencies, and a lack of communication between exchanges. Traders can benefit from having low competition.
Cryptocurrencies are still volatile.
Cryptocurrencies fluctuate regularly. Volatility can cause a price gap between exchanges, offering traders an arbitrage opportunity.
Cons of crypto arbitrage
Because traders need to access many exchanges, they may need to keep their coins on all of them. Since traders keep crypto in an online account, they are vulnerable to hacks. Traders should be aware of the dangers before trading cryptos on less established sites.
Cryptocurrency exchanges do not allow free trading. When evaluating the profit from arbitrage, always include the fees.
Large trades yield increased profits.
After applying the processing delays and fees, arbitrage profits could be pretty small. To generate significant gains, traders need to raise the trade volume.
Some exchanges have strict withdrawal limits. As a result, traders may be unable to withdraw crypto profits to their wallets on the same day.
There are dozens of crypto exchanges that allow traders to trade popular cryptocurrencies like BTC and ETH. Traders can use different arbitrage approaches to spot and profit from the opportunities.
If done correctly, crypto arbitrage can result in massive gains. Lacking the proper knowledge can result in a loss. So, make sure to research and understand before diving straight in.
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