Here are four primary forms of the crypto arbitrage strategy:
Inter/cross-platform
It is the primary type where a trader buys in one exchange and sells the asset in another. Due to real-time price fluctuations, making a profit is impossible if you buy from one and transfer the assets to another platform to sell.
But a profit is possible if the trader has assets in the two exchanges so they can buy and sell simultaneously. Transaction fees can be avoided with this method.
Statistical
Mathematical techniques are utilized for the process, and arbitrage software is often used. Mathematical probability is employed for assessing the profits or losses in a deal. Due to the presence of automation, this form is considered less risky.
Spatial
The geographical location of the exchange plays a crucial role in this form of trading, and the demand for the asset is the main deciding factor. The difference between the inter-platform and spatial types is that trading does not occur with real-time prices.
A trader can manually purchase from a platform in one location where the price is low and sell it on another exchange in a different location where the price is high and make a profit.
Triangular
This form of trading is done with three assets, hence the name triangular. The transactions are done in one exchange. For instance, if a person holds Ethereum, Dogecoin, and Bitcoin, and two are undervalued compared to the other, the difference can be used to profit. Since only one exchange is involved, there are no deposit, transfer, or withdrawal fees.
At the outset, the process looks simple enough without much risk. Further, you can be savvier and have a sophisticated trading setting. But this is not true.
Here are some common myths about arbitrage trading and the facts.
Myths about Crypto Arbitrage
The lack of regulation makes it a hassle-free strategy.
The main attraction in using digital assets for investment and other financial purposes is how they are governed and maintained.
The miners or developers of the digital asset keep track of the transactions and get reimbursed for the process.
The personal involvement of the creators ensures the records are updated and precise. Thus, the currency’s integrity is protected, and the records remain decentralized. The advantages include faster and cheaper transfers. Further, the system does not collapse if there is a failure at any point.
The facts
However, the fact to remember is that a few people wield control over the flow and volume. There is the risk of manipulation and huge swings in the price.
The absence of a single global regulatory system controlling the transfers worldwide is a big concern.
There are regulatory gaps, and a proper standardized arbitrage method needs to be present.
The above factors reveal the danger that crypto arbitrage can present.
Flexible trading advantage
The core principle of crypto arbitrage is that a trader gains from the difference in price between exchanges. The process is considered a low-risk deal that can work in all volatility situations.
Traders get to benefit from a low or highly volatile market. However, the profits gained are insignificant, and it is necessary to trade frequently to achieve significant gains.
The facts
Further, there are other factors like the exchange chosen. Here are some of the facts:
1. A trader can choose a centralized exchange (CEX) like Binance, and it offers perks like convenience, user-friendly processes, and diverse options for trading. But the drawback here is that the fees are higher when compared to other types of exchanges.
2. The DEX (Decentralized Exchange) offers direct control without an intermediary, like a CEX. Smart contracts and liquidity pools enable an easy and less expensive process. But there is a drawback here too. A trader is in full charge of the entire transaction, which is difficult for a novice.
Another drawback is that miners and other stakeholders can capitalize on the transaction information to profit from them.
3. The benefits of CEX and DEX are combined with the hybrid exchanges. The transactions are fast and secure, and they involve less expense. However, the concept is still new and needs to be fully regularized, so caution is necessary for using this format.
Crypto arbitrage provides more profits at lesser risk.
Due to the short period involved in the arbitrage process, the risk is minimal. The process takes just a few minutes, even in high market volatility situations.
The short span leaves little room for alteration in price. However, the system’s success depends on how fast the transactions are.
In other crypto investment strategies, the market liquidity is sustained longer. Due to the highly volatile market, the chances of changes for the worse are higher.
The facts
While the risk is minimal, the method incurs expenses by depositing, withdrawing, and trading charges. So, even if you make a sizeable profit, the expenses will reduce the profits considerably.
One solution to this problem is to choose platforms that levy low fees. Another way out is depositing funds on many exchanges. By reshuffling the portfolios, it is possible to benefit from the market changes.
For instance, if a trader notices a difference in BTC price in Binance and Coinbase and wants to profit from the variation, then instead of transferring funds between the platforms, the trader sells the BTC in Coinbase, for say, $45,200 and buys it for $45000 on Binance.
The profit gained here is $200, and there are no withdrawal or deposit fees here, with just the trading fee to consider, which is primarily negligible. In most exchanges, the transaction fees are low when you trade high crypto volumes.
Ideal for newbies and experts
Unlike day trading, arbitrage does not require a trader to have technical knowledge. The lack of predictive analysis and short span are significant advantages that experts and newbies capitalize on.
The available resources make it easy to complete a trade in a few minutes or even seconds. The above benefits make the strategy seem ideal for all traders. But this is not true.
The facts
Due to the possibility of high profits, the amount of funds involved is huge. Hence, this makes the method prone to high-security risk. Scams and hacks are more common. Many forms of scams exist like
Traders are duped by scammers who inflate prices artificially by feeding fake news. This results in a big rush to sell assets at a huge profit. The trader who buys last is scammed, as the fraudsters would have taken off with the loot.
Many companies commit exit scams when they suddenly stop operations and flee with traders’ funds.
The right way to practice the strategy is to be aware of the security issues. A proper evaluation of the market and the exchange chosen is necessary. It is also best to select reputed platforms to avoid scams and hacks.
Some exchanges have a complicated approval process, making the entire trading futile. Many traders have complained about their deposits needing to be addressed in an exchange or the delay in approval.
Profits can be gained quickly with crypto arbitrage.
A significant benefit of the trading strategy is that a trader need not use a market sentiment or other predictive analytic methods to generate returns.
The critical factor here is generating a fixed profit in the quickest time. Some trades get done in a few minutes or even seconds, and the low span is a significant influencing factor in minimizing the present risk.
The facts
Crypto arbitrage depends entirely on time, and when more traders use it, the price variation can reduce.
For instance, consider two traders, A and B. If trader A buys BTC for $50,000 on Binance and makes a profit by selling it for $50,020 on Coinbase, trader B may not get a similar profit. Due to the volatile nature of the sector, trader B makes a profit of $15 from the trading. This narrowing of price margin can increase, resulting in the trading giving no profit.
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