Arbitrage is possible due to the price difference of the same cryptocurrency in different exchanges or markets. As you know, the cryptocurrency market is growing rapidly day by day, and you can see every time a new cryptocurrency is launched. The market size is getting bigger as well as new market entrants are also increasing. Since the market size is growing, it is also providing ample opportunities to take benefits from the crypto-market, and arbitrage is one of the ways to take advantage of the existing market.
For example, an arbitrage benefit is existing when there is the chance to rapidly buy a cryptocurrency for a low price and sell that for a higher price.
1. Arbitrage between Exchanges
This kind of arbitrage is very simple and primitive and similar to fiat currency arbitrate in forex or commodities commodity. If there are situations where there is dissimilarity in the price of the cryptocurrency in other exchanges, then you may buy the cryptocurrency from one exchange at a lower price and sell that to another cryptocurrency exchange at a higher price. These rapidly buying and selling provides a good profit. However, you have to increase the volume to have a reasonable amount because you have to incur the cost of buying and selling also in the form of services charges. There might be very little profit in every single trade, but it will be reasonably higher if you trade in greater volume. We can see in the following steps.
- Take buy position in cryptocurrency 1, where the price is lowest in exchange.
- Bring out to own wallet
- Sell Cryptocurrency 1 in another exchange where the price is higher than the previous exchange.
- Take away profit
2. Arbitrage within an Exchange
These are complicating types of arbitrage where an investor makes money by trading cryptocurrency. This form of arbitrage is also called as Triangular arbitrage. This type of arbitrage is possible in a tricky way which you can see here step by step.
- Deposit some amount of fiat on a cryptocurrency exchange
- Purchase cryptocurrency 1
- Settle cryptocurrency 1 and buy cryptocurrency 2
- Repeat steps 2 and 3
- Sell cryptocurrency 2 for fiat currency
- Take away the profit amount
Making Money on Arbitrage
- You have to scan for cryptocurrencies with different prices on different platforms.
- You have to buy a cryptocurrency on the exchange that offers the lowermost price.
- You have to move the purchased cryptocurrency to the exchange with the uppermost price.
- You have to sell and earn a profit.
Advantages of Cryptocurrency Arbitraging
There are so many merits that attract arbitrager to trade in cryptocurrency, and few of them are given below.
- Rapid Profits
Anyone may make trades in cryptocurrency and avail the benefits of price differences. This market is still younger, so traders may easily obtain arbitrage opportunities due to the imperfection of the market.
- Bounteous of Opportunities
There are many exchanges where you can trade cryptocurrencies, and many new exchanges are coming up now and then. More exchanges mean more flexibility in price and services, which ultimately tends to greater opportunity.
Most exchanges do not reveal information and work on their own. Most cryptocurrencies experience many rapid rises and sharp drops, which tend to price disparities and gainful arbitrage chances.
- Low Competition
As compared to the other financial assets, cryptocurrency has less number of arbitrageurs which makes it less competitive.
- Price Difference
Cryptocurrency price variances have a habit to range from 3% to 5% and occasionally reaches up to 30-50% in an extreme situation.
The above discussion provides us with the conclusion that arbitrage in cryptocurrency may give you numerous opportunities and profits if traders are willing to trade like arbitrageur. Since, Cryptocurrency is new to the financial world so you can take advantage of all sorts of opportunities including arbitraging, trading, speculation. It has always been thought to be better to invest in a technology-based portfolio, and cryptocurrency is based upon a blockchain which is advanced technology. Additionally, cryptocurrency is a highly secure, cost-effective and peer-peer transaction.