Sometimes a flaw in something could mean a golden window for another aspect. The concept of arbitrage trade crypto, or arbitrage trade in general, was developed based on such ethos. The trading market, be it Forex or crypto, is not always fairly priced. In other words, you cannot always expect, say, BTC, to command the exact same price universally in all exchanges at the same time. This condition is called market inefficiency- a market condition where a particular commodity is not evenly priced. And this particular flaw, market inefficiency, offers a window for trading from the price differences. This is where you can sign up for arbitrage trade crypto. Check out more about arbitrage trade crypto at multibank.io.
Decoding arbitrage trading in crypto
Before getting into arbitrage trade crypto, let’s have better clarity on the core concept of arbitrage trade.
In arbitrage trading, traders purchase an asset from one exchange and then sell the same at another exchange. Now, why are the traders hopping between different exchanges for buying and selling? Well, it’s because the second exchange is offering a higher price for the same asset. To make it simpler, arbitrage traders capitalize on temporary small price gaps that occur for the same asset across multiple exchanges.
The concept of arbitrage trade crypto is the same thing that is mentioned above- the only thing is that it in this case, it applies to the crypto sector.
Let’s say BTC is selling at $35,500 in one exchange. But another exchange shows $36,000 for the same asset. Now, an arbitrage trade crypto trader will march on for the $500 difference and sell the crypto to make profit from that little difference.
It can be said that arbitrage trade crypto is a low-risk trading strategy and you don’t need much experience to execute the same.
Strategies for arbitrage trading in crypto
When it comes to arbitrage trade crypto, there are three chief strategies to pick from-
Cross-exchange arbitrage trading
The simplest form of arbitrage trade crypto, the cross-exchange strategy is all about trying to make profit by purchasing crypto from exchange A and then selling the same at higher price at exchange B, C, and so on.
Spatial arbitrage
In spatial arbitrage trade crypto, you do the exact thing that you do with the trading strategy mentioned above. The difference with spatial trading strategy is that this particular strategy allows you to conduct the trade in between international exchanges.
Triangular arbitrage
Unlike other arbitrage trading strategies, the triangular option focuses on not one but 3 cryptos with varying values. So, you will begin the trade with one high-priced crypto. Next, you will trade the same with the second crypto (comparatively undervalued) on the very same crypto exchange. Then, the second will be traded for the third crypto that’s comparatively overvalued in comparison to your first pick. In the last stage, the third one will be traded for your first pick.
Tips for arbitrage trade crypto
The arbitrage trade crypto seems like a straightforward process but it does involve some homework or research on the end of the trader. The post below offers a brief on the tips to follow while you aspire for a successful experience with arbitrage trade crypto.
Study prices across exchanges
This is the most laborious process involved in arbitrage trade crypto.
If you have plans for arbitrage trade crypto, you should start early. Take a survey of the prices offered for your chosen asset across multiple exchanges. Check to find a pattern- it could be that exchange B always shows a higher price for Ethereum than exchange A. So, if you find a pattern, try to follow that.
When it comes to arbitrage trade crypto, you have to act real fast. Crypto market is extremely volatile and the prices can change at any moment. The concept of arbitrage trade crypto thrives on temporary price shifts- you have to make the most of the little time left to make profit from arbitrage trade crypto.
Now, how will you study the prices for a quick arbitrage trade crypto? You can conduct the process manually. But, there are over 600 cryptocurrency exchanges today. You are certainly not going to study all of them but even if you study at least 10-15, that too is a whole lot of numbers.
Good thing is, today you have price or exchange tracker software or bots. These applications will study and keep track of the market on your behalf so that you have readymade data just when you need it.
High trading volume
If you are planning to execute arbitrage trade crypto on a centralized exchange, you will have to wait till the buy-and-sell-order matches with another trader. As mentioned above, arbitrage trade crypto is about making the most of temporary price shifts. What if the wait period for the perfect match is too long? What if the price gap decreases in between?
Now, there is a way to avoid such mishaps in arbitrage trade crypto. The best tip here is to go for a crypto exchange that can assure higher trading volume compared to other exchanges. Exchanges with higher trading volume are always having trades and hence you won’t have to wait for long to find the seller and execute the arbitrage trade crypto.
Otherwise, you can go for decentralized exchanges for arbitrage trade crypto. These decentralized crypto trading platforms are supported by liquidity pools that assure easy flow of liquidity across the exchange. Decentralized exchanges allow traders to trade any time and you don’t have to waste time waiting here as you have to do with arbitrage trade crypto on a centralized exchange.
Final words
You should also take note of the transaction fee charged by the second exchange where you are planning to execute the arbitrage trade crypto. Make sure the profit won’t get dissolved into high trading or transaction fees. If the transaction fees, don’t sell the asset even if the price gap looks decent. The beauty of the crypto industry is that it can swing to dramatic highs any moment. Thus, wait till you get a higher difference in price so that you can earn higher profits with arbitrage trading, even after paying for transaction fees.