Arbitrage trading is trading strategy where by a trader looking to enter a trade within a slight price discrepancies of an assets across a different markets or exchanges. And the main benefits of arbitrage trading is for investors/trader to make frequents trades with very low-risk returns.
What is arbitrage?
Simple mean a process of buying and selling a digital assets (Crypto) on one market place to another exchanges and sell it frequently where the price is higher.
You don’t need to be a professional trader or investor, anyone can start arbitrage is a very simple idea that involves little or no risk. It means taking advantage of differences between prices for the same financial instruments on different exchanges.
Let’s assume one city with two markets. On one side, we have Market A and on another – Market B. There are two identical products on these markets, for example, oranges.
Bananas on the Market A and Bananas on the Market B are similar, however, the price of one Mangoes on Market A is $.50 cents, and the price of a similar orange on Market B is $1 dollar.
How can we take advantage of this situation?
We can start buying bananas on Market A, and selling them on Market B.
If we have 100 dollars, we can buy 200 bananas on Market A where their price is 50 cents per Bananas. Then, we sell these 200 oranges on Market B where their price is $1 dollar.
In the end, we have 200 dollars. By doing so, we’d need to pay gas fee in order to transport these 200 oranges from one part of the city to another one.
Let’s assume, the gas price is $15 dollars.
This means that we have to spend our initial 100 dollars to buy bananas + 15 dollars.
In the end, we get 200 dollars back. Therefore, the actual profit makes $85 dollars.
We can repeat this process until the prices of Bananas would be almost identical on both markets. By using this price difference, we also influence demand and supply for bananas on both markets. The price of bananas on Market A will increase since we increased the demand for bananas.
However, on the Market B, the price of bananas will start to drop, since we increased the supply of bananas. This is a very simply and clear explanation of arbitrage.
Financial and Crypto Markets Arbitrage Trading
It’s very common to have same coins, tokens or currencies priced differently on different platforms, exchanges and you can use this techniques to spot a difference in the pricing of a digital assets across two or more exchanges and execute a series of transactions to earn profits. In fact, it’s not a new technique.
The techniques has been existed on financial markets for a while. When it comes to crypto, there are plenty of exchanges.
There are so many trading pairs and assets on these exchanges, and their prices vary. Essentially, we have big exchanges with a pool of liquidity, and we have small exchanges that follow big exchanges’ prices.
These prices aren’t usually updated in real time. That is why an arbitrage opportunity exists.
Crypto arbitrage helps traders to take advantage of the price differences by buying cryptocurrency on one exchange and selling it on another immediately.
If you’d like to see an example on real exchanges, you can go to CoinMarketcap and check different exchanges and their asset prices. In most cases, you won’t find big differences.
However, sometimes there are huge price differences, such as 2, 5 or even 15% for some trading assets. Sometimes different exchanges do promotional activities when you can get additional coins or tokens of you use specific exchanges and deposit on your account, and you can use it to earn profit.
Different types of arbitrages
There are different types of arbitrages, which as follows
· Simple (cross-exchange) arbitrage
· Triangular arbitrage
· Risk arbitrage (Spatial)
Simple Arbitrage (Cross-Exchange)
Simple arbitrage means that you buy a coin or token on one exchange and sell it on another within a short period of time. You take the risk of transferring coins between exchanges but you earn profit on the price differences.
Another approach is that you can have currency and fiat on both exchanges and trade them according to the situation, so there wouldn’t be a transaction acquired at the time of the operation.
Example, if we have ETH on Binance that costs $4000 dollars, and we have same ETH on Coinbase with the price of $4050 dollars, we can spend $20.000 dollars and buy 5 ETH on Binance, then transfer these 5 ETH to Coinbase and sell them, thus getting $20.250 dollars.
250 dollars is the profit. Then you should also count the transaction time, gas fees, and exchange rates.
Triangular Arbitrage
Triangular arbitrage is a little more different compared to simple arbitrage.
This type of arbitrage usually involves 2 trading pairs of three assets, and there’s
One same asset in these two trading pairs. In order word is the process of moving currency between three or more digital assets on a single exchange to capitalize on the price discrepancy of one or two assets.
Example: we have ETH/USD on one exchange and ETH/EUR on Kraken.
For example, you buy 5 ETH with USD on Binance, then transfer these ETH to another exchange, and exchange them to EUR on Kraken.
Then, you convert EUR to USD and make profit from it.
The scenario here is that the process has multiple exchanges you need to take into account. However, it can also be on one exchange.
This type of arbitrage is difficult to find these days, since there are a lot of robots that are constantly looking for these kinds of scenarios and using them.
Risk Arbitrage (Spatial)
The only different from simple arbitrage is that the exchanges are located in different markets regions. To give you a clear explanation, let’s say there are two companies on the market – company C and company D. The news come out that company C will acquire company D. The value of company D will increase as a result of this acquisition.
You can take the risk and buy company D’s stocks.
If the information was correct, your investment will work but if the news were fake, that’ll lead to losses your investment. This is what’s called risk arbitrage due the uncertainly inherent to it.
On crypto market, you can hear about a promising coin or token that’s getting listed on an exchange or a cooperation between multiple projects.
This creates behavior spikes that decide price changes on multiple exchanges.
There multiple ways how you can use arbitrage techniques to earn money.
For example, you can use fiat or even futures long or short orders after you find a difference on the markets.
Let’s assume, we see ETH on Binance with the price of $3000 dollars.
$3100 dollars is the price of ETH on Coinbase.
Thinking that there will be a lot of people exploiting the arbitrage situation, we reckon that the price will eventually be almost identical on both exchanges, let’s say $3050 dollars.
Then what we do is that we open ETH long position (buying) on Binance and a short position (Selling) on Coinbase.
After the prices near $3050 dollars, we close both positions and make profit.
The advantages of arbitrage trading is that the risks associated with it are generally low.
Things to Consider When Arbitrage Trading
· Use legitimate exchanges.
The exchanges you can’t trust or those that can be easily hacked increase your risks to lose your investment
· Network and withdraw speed.
As you find a good situation on the market, you need to find out the network speed of all transactions if you’d like to proceed. Often, the window of opportunity is very short and if the transaction speed is slow, you won’t make profit but lose money
· Price adjusters/exchange rate adjustments.
There are multiple systems when it comes to adjusting the prices between exchanges. You need to monitor the prices constantly to be sure that the opportunity is still there
· Minimum input cost and fees.
You’d need to calculate the minimum input costs, since there are transaction fees that are particularly attach to any transaction, its important if you do multiple transactions and withdrawals
· Volatility/News.
Depending on the volatility of the pair you’re trading, you can maximize or minimize your profits and loss by listing and watching the News and the market.
So while you are executing arbitrage make sure you are constantly monitoring it.
· Terms and services.
Before proceeding with arbitrage on any exchange, understand their rules and terms of use.
Some exchanges have multiple withdrawal limits or even have arbitrage restrictions take this into consideration
· Accounts accessibility.
To do any kind of arbitrage, you’d need to have an account.
Some exchanges only enable accounts for people base on their country of residence.
If your country isn’t on the list, it might be a problem for you.
· Taxes.
Depending on your citizenship or country of residence, different tax rules apply.
Make sure you know them and understand them clearly.
How to find arbitrage opportunities?
Many people do so manually but there are lots of screeners which constantly monitor multiple exchanges and assets that’ll help you filter the opportunities on the market.
How to execute arbitrage opportunity?
Manually, which might make the process very difficult and repetitive.
To avoid that, you can use a robot or a bot to help you execute the operation precisely.
There’s a bunch of robots on the market already, but if you have programming knowledge, you can write a bot script for yourself.
Note that. You should always need High network speed and up-to-date news about currencies you’re looking to arbitrate. And also to calculate additional costs necessary to execute it.
RISK DISCLAIMERS
This website includes information about cryptocurrencies, (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money. knowaboutcryptocurrency.blogspot.com encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved. All contents on this site is for educational, and informational purposes only and does not constitute any financial advice. Consult relevant financial professionals in your country of residence to get personalized advice before you make any trading or investing decisions. Knowaboutcryptocurrency.blogspot.com may receive compensation from the brands or services mentioned on this website at no additional cost to you.
Risk Warning: Trading CFDs on leverage involves significant risk of loss to your capital.
No comments:
Post a Comment