What is Cryptocurrency Arbitrage?

The term arbitrage has started to gain popularity ever since the bond, foreign and stock markets have been in existence. It is a simple concept that relies on buying and selling an asset in several markets to gain a profit from the price difference. Let’s say, for example, you see that Ethereum is available to a price that is higher on Zipmex than it is on Indodax – the logical step here would be to buy ETH from Indodax and sell it on Zipmex, so you can cash in on the difference. Sounds as easy as getting a free £20 no deposit offer at a new online casino, but here are multiple other things that need to be considered.

There are two big categories when it comes to crypto arbitrage:

• The Triangular arbitrage, which an arbitrage between multiple exchanges
• Arbitrage within the same exchange

The first one is the most common among traders, and it’s about purchasing two cryptocurrencies that belong to the same exchange and selling them wherever you see a difference in cryptocurrency prices. At the same time, you have to make sure you are taking into account the rewards and risks that come with it, of course.

Besides the normal method, there are also two other arbitrage options – statistical and cross-border. Cross-border arbitrage happens between two exchanges from different countries. The statistical arbitrage can be a bit difficult, as you need to be familiar with mathematical modeling. As things can change pretty fast in the crypto market, it can be quite risky.

Is It Legal to Practice Cryptocurrency Arbitrage?

Yes, it is as legal as mining cryptocurrency, and exchanges are offering their specific rate for currencies. Although the price tends to be approximately equal throughout the exchanges, sometimes you can notice a 5-10% deviation or even 20% in extremely rare cases.

While cryptocurrency stocks have been around for some time now, they are still highly volatile and decentralized. Experts say the market is still developing, and because of this, arbitrage opportunities may arise more frequently in comparison with the other markets. To put it in simpler terms, the phenomenon is based on market inefficiency, not on actions made by a group of individuals.

A consequence of the cryptocurrency arbitrage phenomenon is that more and more traders are engaging in it, and the chance of opportunities is slimmer and slimmer.

Pros of Crypto Arbitrage

• Instant Profits

You can make the movements as soon as the transaction is finalized, which can happen in one hour or even less. As opposed to buying the best cryptocurrency there is the traditional way, and holding it to sell when the right time comes, at a later date.

• Multiple Opportunities

The number of crypto exchanges is growing each day and, as a consequence, there is an impressively large number of arbitrage opportunities. Fun fact: there are over 319 crypto exchanges available today.

• The Market is Developing

 Everybody knows about crypto, but very few have accepted it, which keeps the market in the early developmental stages. Because of this, there is still disjointing, lack of information, and irregularity when it comes to transfers between exchanges. Additionally, there are few crypto traders which leads to less market competition, creating price differences.

• Crypto is Still Volatile

Even though the first one surfaced in 2009 – Bitcoin, the top cryptocurrency – it is more volatile than most of the other coins. This is mostly happening because it is still being decentralized and due to the changes in supply and demand. Because it is still highly volatile, the cryptocurrency price changes appear, thus creating opportunities for cryptocurrency arbitrage.

Cons of Crypto Arbitrage

• Storage Problems 

Since arbitrage requires you to have access to several exchanges, you may find yourself in the position of needing to store your coins across all of them. Additionally, since you are storing them in online accounts, they are also susceptible to hacking. Always be aware of these risks and take appropriate security measures.

• KYC Restrictions

To arrange trades on any of the cryptocurrency exchanges you will need to obey several mandatory KYC regulations. For example, on some exchanges, you need to have a bank account in the territory of the exchange (same country). Or, in other instances, you might need a bank account linked while also verifying your identity. Sometimes the KYC process can take 24 hours.

•  Fees
  

There is not one crypto exchange that will allow you to trade, deposit or withdraw for free. More often than not there is a fixed percentage that is charged as fees. So make sure to also include this aspect in your cryptocurrency list when you calculate the profit.

What to Keep in Mind Before You Try It

• Have a Strategic Plan

Before you go and jump into the arbitrage world, take a moment and consider some of the most important factors and questions. Set the amount of money that you want to invest in a trade. Know beforehand what are your profits and what are the possible feed that will sting your profit.

• Always Monitor the Market

Opportunities are arising at any time of the day, so you need to always keep an eye on the cryptocurrency market. You will have plenty more chances during volatile periods, so keep a close eye on recent developments and news that can kickstart suck opportunities.

• Diversify

Don’t limit yourself to three-four exchanges, as chances for arbitrage opportunities will be lesser, or in the best case, you will make a minimum profit. If you wish to have a decent profit, make sure you engage in multiple exchanges. Stay informed on every new cryptocurrency that surfaces on the market. Like the famous saying goes: „Don’t put all your eggs into one basket”

Conclusion

There are several techniques for arbitrage and as many opportunities that you can benefit from at this moment, whenever a new market inefficiency appears. However, the window is getting smaller and smaller, as more traders join this new phenomenon. Thus, stabilizing the market and causing the prices to grow more and more similar. What do you think is the most important aspect to consider? Feel free to share your opinion with the rest of the crypto enthusiasts in the comments section or contact us here to take the discussion even further!

We are also starting a new service as Crypto Currency Trading Consultancy very soon. Till then, stay tuned!

Author’s Bio

Edward is enthusiastic about assisting businesses, especially local firms, in developing a more personal online relationship with their consumers and prospects. While trading and market research is his strong USP, his expertise in finance works like an added charm to his credentials! He is a finance genius!

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