Crypto arbitrage trading is a type of trading strategy where investors capitalize on slight price discrepancies of a digital asset across multiple markets or exchanges. In its simplest form, crypto arbitrage trading is the process of buying a digital asset on one exchange and selling it (just about) simultaneously on another where the price is higher.
Arbitrage exists in traditional financial markets long before the emergence of the crypto market. And yet, there seems to be so much hype surrounding the potential of arbitrage opportunities in the crypto scene. You must have heard of USDT/INR Arbitrage Opportunities and how some people made tons of money via this Arbitrage strategy.
The hype around arbitrage opportunities in the crypto markets is most likely because the crypto market is renowned for very highly volatility (as compared to other financial markets). This highly volatility leads crypto prices to deviate significantly over a certain time period on different exchanges. Because crypto assets are traded globally across hundreds of exchanges 24/7, there are far more opportunities for arbitrage traders to find profitable price discrepancies.
All a trader would need to do is spot a difference in the pricing of a digital asset across two or more exchanges and execute a series of transactions to take advantage of the difference.
For example, let’s assume the price of bitcoin is $45,000 on the Coinbase cryptocurrency exchange and $45,200 on Kraken. In this scenario, crypto arbitrageurs might spot this disparity and buy bitcoin on Coinbase and sell it on Kraken to pocket the $200 price difference. This is a typical example of a crypto arbitrage trade.
What is Direct Arbitrage in Crypto?
This is the basic form of arbitrage trading where a trader tries to generate profit by buying crypto on one exchange and selling it on another exchange. This strategy is also known as Cross-exchange arbitrage. In Direct (or cross-exchange) - Basically you buy from exchange A (say Binance) and sell it at exchange B (say Kucoin).
What is Spatial arbitrage in Crypto?
What is Triangular Arbitrage in Crypto?
Triangular arbitrage also knows as three-point arbitrage involves three exchanges. You buy from one exchange A convert it in exchange B and sell it at exchange C.
Another form of triangular arbitrage involves three or more cryptocurrencies. In this strategy, the process involves moving funds between three or more cryptocurrencies on a single exchange to capitalize on the price discrepancy of one or two cryptocurrencies. For example, a trader can create a trading loop that starts with bitcoin and ends with bitcoin.
A trader would exchange bitcoin for ether, then trade the ether for cardano’s ADA token and, lastly, convert the ADA back to bitcoin. In this example, the trader moved their fund between three crypto trading pairs – BTC/ETH → ETH/ADA → ADA/BTC. If there are discrepancies in any of the prices of the three crypto trading pairs, the trader will end up with more bitcoin than they had at the beginning of the trade. Here, all the transactions are executed on one exchange. Therefore, the trader does not need to withdraw or deposit funds across multiple exchanges.
What is Loop Arbitrage in Crypto?
As the name suggests it involves only two exchange for doing 3 step arbitrage i.e Buy, Convert, Sell and also having the buy exchange similar to that of sell exchange in all cases. For eg; If you buy a coin from Koinex, convert your coin in Binance and then sell it at Koinex so making a circle.
As the name suggests it involves only one exchange in which you buy in one market and sell it in another market in the same exchange.
What is the difference between Triangular and Loop arbitrage in Crypto?
A triangular arbitrage, as it implies triangle, involves three different exchange for doing 3 step arbitrage i.e. Buy, Convert and Sell. For eg: You buy a coin from Koinex, convert your coin in Binance and the sell it at BitBns.
On the other hand loop arbitrage, as it implies circle, involves only two exchange for doing 3 step arbitrage i.e Buy, Convert, Sell and also having the buy exchange similar to that of sell exchange in all cases. For eg; If you buy a coin from Koinex, convert your coin in Binance and then sell it at Koinex so making a circle.
Note: In Triangular arbitrage buy exchange and sell exchange will never be the same.
Why is Crypto Arbitrage considered a low-risk strategy?
You might have noticed that, unlike day traders, crypto arbitrage traders do not have to predict the future prices of bitcoin nor enter trades that could take hours or days before they start generating profits.
By spotting arbitrage opportunities and capitalizing on them, traders base their decision on the expectation of generating fixed profit without necessarily analyzing market sentiments or relying on other predictive pricing strategies. Also, depending on the resources available to traders, it is possible to enter and exit an arbitrage trade in seconds or minutes. Bearing these in mind, we can therefore conclude the following:
- The risk involved in crypto arbitrage trading is somewhat lower than other trading strategies because it generally does not require predictive analysis.
- Arbitrage traders only have to execute trades that last for minutes at most, so the exposure to trading risk is significantly reduced.
However, this does not necessarily mean that crypto arbitrageurs are completely free from risks.
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