The main thing about crypto arbitrage is that it benefits from the market inefficiencies and takes advantage of them. That is how traders make a profit on price differences.
Let’s say, for example, that Bitcoin trades at $45 000 on one exchange and $45,100 at a second. Arbitrageurs would buy the currency on the prior platform and move it to the latter service. In this case, the result would be $100 profit for one Bitcoin.
And If the traditional financial industry rarely offers such possibilities, the cryptocurrency space gives excellent arbitrage opportunities.
Let’s have a closer look at the three best and most popular crypto arbitrage strategies.
Simple Arbitrage
As you can see from its name, this is one of the easiest cryptocurrency arbitrage strategies and could be described with the previous example. If you see an opportunity, you buy the cryptocurrency from an exchange with a lower price and withdraw it to the other platform, so you can sell it for a higher price.
This is an easy and fast crypto arbitrage strategy, as you don’t have to perform any other trades. And because of its simplicity, the chance of other arbitrageurs taking the same opportunity is much higher.
Triangular Arbitrage
This type of cryptocurrency arbitrage can take place either across different exchanges or on the same platform. As the name suggests, triangular arbitrage takes advantage on the inefficiencies across three cryptocurrencies.
For example, if an arbitrage opportunity occurs when the BTC/USDC pair is trading at $45,000, and one ETH equals $2000, but the BTC/ETH pair is priced at 30 ETH.
In such a scenario, the triangular arbitrage strategy will look like this:
Step 1 You deposit funds to the exchange and purchase 1 BTC for $45,000.
Step 2 You trade the BTC/ETH pair to convert your Bitcoin to 30 ETH.
Step 3 Finally, you sell the 30 ETH for 60,000 USDC.
As you can see, this arbitrage opportunity would have generated you $15,000 in profits. Unfortunately, such a possibility is not very frequent, so you should take advantage of it immediately before the platform corrects the error.
Yield Arbitrage
Yield arbitrage strategy gives traders the opportunity to profit on inefficiencies between two DeFi platforms.
As we know, DeFi (decentralized finance industry) is new but at the same time fast growing, irregularities related to interest yields could be seen very often.
Yield arbitrage allows traders to borrow funds in a stablecoin with a lower annual percentage yield (APY) for borrowing, exchange it to another stablecoin with a higher supply APY, and use the latter cryptocurrency to lend funds to others.
This crypto arbitrage strategy can work excellently on a single or multiple DeFi lending protocols, but you should not forget about gas fees, which could sometimes be extremely high.
Conclusion
Cryptocurrency arbitrage opportunities may seem highly profitable at first glance, but still there are other factors like the high trading costs or exchange fees that will decrease your profits or may even lead to losses.
That is why you need to take everything into account and research every possibility before performing your crypto arbitrage strategy.
While there are different strategies and opportunities for cryptocurrency trading, it is important to act quickly, before the opportunity disappears. Fortunately, you don’t have to do this by yourself, as there are automated trading platforms, such as CryptoArbi, which will do the hard work for you.
Here, at the CryptoArbi platform you can explore every crypto arbitrage opportunity, and make the best out of it.
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