Crypto trading has long been making some traders hefty sums of profits. However, trading cryptocurrency comes with its fair share of risks.
The past year started off with a bang and every crypto asset witnessed new all-time highs. Unfortunately, 2018 ended with a whimper after the crypto market was dominated by the bears year around and the digital currencies fell back to their lowest in 18 months. Even Bitcoin following one of its biggest bull rallies to $19,500, dropped down by 80 percent by the year-end.
2018 was a testimony to the fact that digital currency can swing wildly and nobody can know the market for certain.
This is where the concept of arbitrage trading comes in. If you are an investor or perhaps a digital currency enthusiast, the term arbitrage exchange may sound familiar. The concept of Bitcoin arbitrage holds many a trader’s fixation since it is one of the best ways to make money trading Bitcoin quickly and with minimum risk.
Arbitrage Exchange in a Nutshell
Arbitrage exchange is a popular trading strategy wherein you exploit the difference in the price of the same asset on different exchanges. The approach allows pro-traders to make profits from discrepancies between exchange rates.
Looking at the Bitcoin arbitrage trading, it involves buying and selling Bitcoin simultaneously to make a profit from the difference in price on different exchanges.
For instance, suppose Bitcoin is listed for $9000 on exchange A, while exchange B has a Bitcoin price of $9150. You can buy Bitcoin on the cheaper exchange and simultaneously sell it on the more expensive exchange to make a profit.
Quite simple, right? Undoubtedly arbitrage exchange trading is an excellent opportunity to make generate passive income, but it has risks too.
Barriers to Bitcoin Arbitrage
Arbitrage trading is quite prominent in the crypto market. According to CoinMarketCap, there are a total of 227 exchanges globally (at the time of writing this article). As a result, the market is brimming with opportunities to take advantage of arbitrage trading. However, there are a few factors that one must consider in order to benefit from arbitrage exchange trading.
Each transaction requires verification, which costs precious time during which rates might fluctuate. Since the buying and selling have to be done simultaneously, time is of great essence. Furthermore, many exchanges have a lengthy verification process when it comes to trading a large number of Bitcoins.
Several crypto exchanges charge a certain fee that you must take into account while trading. There are centralized exchange fees and transaction costs that you must examine before executing trades to maintain profitability.
For arbitrage trading, you must maintain liquidity of at least 10-1 on both sides. Meaning, if the trade requires 0.1BTC, it’s essential that you have a balance of minimum 1BTC on both the exchanges.
Effective Strategies to help you jump on arbitrage opportunities
Typically profitable trading boils down to settlement speed, execution, transfer times, and some other outside factors. Considering the volatility of the crypto space, it wouldn’t be wrong to say that there is a significant possibility of an excellent opportunity vanishing in seconds and even the trader to lose money. However, some strategies can help you take advantage of the arbitrage opportunities when they arise.
Preparation is the key
Considering the impact of time delays while trading, it’s crucial to stay prepared so that you can act quickly when an opportunity arises. Keep a combination of fiat and BTC on multiple exchanges. This way you can promptly seize any opportunity that occurs between those exchanges without having to wait for a transfer bank account and the exchanges.
Identifying Bitcoin Arbitrage Opportunities
You can identify arbitrage opportunities with the following:
- Pricing: Different exchanges may list the same asset at different prices. The difference in profit is where your opportunity lies. However, to exploit the opportunities via this method you must consider trading fees for a coin; costs incurred on withdrawing/depositing a coin; blockchain network fees; and in addition to that the time factor. This method is highly dependent on a window of opportunity and hence the speed of transactions directly impacts the risks and profits.
- Geography: The prices of cryptocurrencies may vary from country to country due to the factors associated with supply and demand. Therefore, geographical arbitrage presents a unique platform to take advantage. However, it’s critical to factor in the regulatory differences and laws unique to every country’s financial governance. If you can manage to comply with the laws and regulations, then geographical arbitrage is a great opportunity.
- Listing Arbitrage: At the time when a crypto asset is listed on a new exchange, it offers tiny a window of opportunity for profitable price arbitrage.
Once you effectively figure out where to look for the best arbitrage opportunities for you, you can quickly strategize and start making profits.
While Bitcoin arbitrage might seem easy, but once you factor in the fees and time it takes to capitalize on arbitrage opportunities, it becomes a lot harder to make profits. However, once you understand the costs, Bitcoin arbitrage can be a really useful tool for a trader.
Varsha is a freelance content marketer, who’s been writing passionately for the past six years. She writes for a wide assortment of niches but always preferred writing about the latest technologies and developments. Stay tuned to read more of her blogs!
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