You may be wondering what cryptocurrency arbitrage even means. Well, let us explain.
Cryptocurrency arbitrage is when someone buys and sells different cryptocurrencies at different prices in order to profit. It’s similar to how stock traders buy and sell stocks for profit.
The Basics of Cryptocurrency Arbitrage
If you’re interested in learning more about cryptocurrency arbitrage, there are several ways to do so. One option is to use an exchange platform. These platforms allow users to trade between various cryptocurrencies. Another option is to use a crypto wallet. A crypto wallet allows users to store their own private keys and access their funds directly.
Advantages and disadvantages of cryptocurrency arbitrage
Advantages
Low risk
One of the greatest advantages of cryptocurrency arbitrage is the low risk. Investors buy and sell assets simultaneously, and there isn’t almost any risk. Of course, there isn’t a guarantee of a profit, so you need to do a good research before making any investments in cryptocurrencies.
Flourishes in volatile markets
As we already said, arbitrage is one of the trading methods with the lowest risk involved.
Not reliant on bear market
Another great advantage of cryptocurrency arbitrage is that you can profit regardless of the market direction. Moreover, there are even more arbitrage opportunities during a bear market.
Disadvantages
Fees
Most of the exchanges make profit from transaction fees they take from traders. Sometimes it is possible that these fees hurt the arbitrage trader and bring the profit to minimum, or even to loss.
Arbitrage is unpredictable
While you can make good profit from cryptocurrency trading, you can never predict the profit, as you can not predict anything related to cryptocurrencies and exchanges. We can all remember a moment when an exchange freezes or even crashes, which can lead to huge losses for traders and investors.
Regulations
There are some regulations like KYC and AML that are able to impact cross-border arbitrage.
Types of cryptocurrency arbitrage
Spatial arbitrage
This is the most common arbitrage, allowing investors to buy an asset on one exchange and then transfer it to another - selling it for a higher price.
Anyway, this type of arbitrage is not the most valuable one because of costs, transfer times, spreads, and other issues. Simply said, there is a big chance for the price to change, while we transfer the crypto to another exchange.
Spatial arbitrage without transferring
This arbitrage method eliminates issues like transfer time and cost, and that is the reason for it to be way more preferred by most crypto day traders.
Triangular arbitrage
This arbitrage method includes a single or more exchanges, while exploiting the differences between trading pairs. Triangular arbitrage includes trading between three cryptocurrencies and then going back to the first, for example BTC to ETH, ETH to LTC and LTC to BTC. If there is a substantial difference, traders will make a profit.
Conclusion
Cryptocurrency arbitrage is an investment strategy where traders buy low and sell high. This allows them to profit from price differences between different exchanges. However, it requires patience and discipline. It also requires a good strategy and research. Fortunately, there are many online trading platforms that help traders with their hard work.
Cryptoarbi is an automated arbitrage platform. All you need to do with us is choose a subscription plan, and we will do the work for you!