What is Crypto Arbitrage?
Seasoned traders may be familiar with the term arbitrage, which is a well-used trading strategy for stocks, forex and other commodities. It is a simple endeavour that requires buying an asset for a small price on one market or exchange and selling it on another for a higher price.
The great news is that crypto arbitration is gaining traction right now, so those who prefer to deal with digital assets like these can get in on the action, too.
How is money made via arbitrage trading?
A more in-depth look at this trading strategy only shows how simple it is. With the principle aim of buying cheap and selling high, there isn’t actually much more to it. One of the biggest things to look out for when considering profit margins is the spread for each transaction - and while these aren’t typically going to be significant trade by trade, every little profit adds up. There are rare opportunities where larger sums of money can be made, but the more effort you put into your endeavours, the more you’ll get out.
Why opt to use arbitrage strategies with cryptocurrency over traditional trading
One of the biggest drawbacks to typical arbitrage trading strategies is the fact that algorithmic trading has been growing in popularity in recent years. This has made it easier for traders to spot opportunities, make transactions quicker and take advantage of many more trades per hour/day.
While this may sound fantastic (and in a lot of ways it is), it also means that the window of opportunity is significantly smaller, so you need to get in even faster to enjoy potential profits. This can be almost impossible if you don’t have access to a trading bot.
When considering crypto arbitrage, this simply isn’t the case as the favoured AI software used isn’t geared toward digital assets. It’s also worthwhile to remember that many traders still prefer to stick to traditional stocks and investment vehicles, leaving crypto to the newer generations. This means that competition is low and the fantastic opportunities are still as accessible as ever.
Another plus point to crypto arbitrage in specific is the sheer number of crypto exchanges that are out there (both centralised and decentralised), as well as the inception of decentralised finance liquidity pools. As there are so many marketplaces, there are multiple opportunities to find pricing discrepancies.
Top techniques to practice when arbitrage trading with crypto
- Newly listed coins can have the most profit potential
This typically occurs because newer coins tend to be released to different exchanges at varying times, creating more discrepancies in pricing than well-established coins. As prices will change between the initial coin offering (ICO) and the acceptance of the coin by traders, there are even more opportunities to be found here.
- Monitoring localised laws can be your friend
The legality of cryptocurrencies can be an asset when arbitration is concerned. Typically, when countries decide to crack down on their digital asset laws, people want to sell off their investments at lower rates to remain compliant.
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