When investors begin to invest in crypto, they may find that it comes with some difficulties. Not only can crypto be challenging to understand, but there is often a high barrier to entry. Even some of the most seasoned investors have difficulty getting into crypto trading.
In crypto investing, as with all successful investing, knowledge is vital. A basic understanding of the ins and outs of crypto will significantly help your experiences and allow you to make informed investment decisions.
One way investors can optimize their experience with investing in crypto is by knowing what crypto arbitrage is. This article will go over everything you need to know about crypto arbitrage to take advantage of opportunities in the crypto market.
Before you begin learning about crypto arbitrage, it is good to know some basics of cryptocurrency if you have never researched it before.
What Is Crypto?
Cryptocurrency is a digital or virtual currency that utilizes cryptography to secure transactions. It does not rely on banks to verify transactions; it is a peer-to-peer system that allows anyone from anywhere to partake in transactions.
When a person transfers cryptocurrency funds, it is stored in digital wallets because it is not a physical or tangible currency.
The way that cryptocurrencies can record transactions is through a distributed public ledger known as a blockchain. This keeps a record and updates all of the user’s transactions.
People created cryptocurrency units through mining, which is the process of having computers solve complicated math problems that generate coins.
There are many examples of cryptocurrency, the most popular being Bitcoin (BTC), the first cryptocurrency. Another popular example is Ethereum (ETH).
There are many more forms of cryptocurrency that people project to come out in the future. It has been known to be a volatile yet exciting currency with a lot of investment potential.
One potential that people can take advantage of is called crypto arbitrage.
What Is Cryptocurrency Arbitrage?
Crypto arbitrage is essentially a strategy in which investors can buy crypto on one exchange and then quickly sell it on another exchange for a higher price on a cryptocurrency exchange, making a sizable return.
Because crypto is sold on multiple different exchanges (i.e., Coinbase, Binance, and Kraken), it may be the case that a form of crypto is more expensive on one cryptocurrency market than the other.
These price discrepancies are where crypto arbitrage strategies become helpful for investors. It is a legal cryptocurrency trading strategy in which an investor can buy an asset cheaper on one exchange and then sell it for more on a different market.
Arbitrage is also common in the capital markets, so it is not altogether unique to crypto.
What Are the Different Forms of Crypto Arbitrage?
Investors should be aware of different forms of arbitrage traders on trading platforms. Different types of arbitrage allow for different strategies with various types of crypto.
The first type of arbitrage is called spatial arbitrage. This is one of the main arbitrage opportunities for crypto arbitrage traders. Spatial arbitrage allows investors to capitalize on different prices depending on the region or exchange they are trading on.
The significant advantage of spatial arbitrage is that it capitalizes on price differences across exchanges but is prone to risks and volatility with transfer times.
The second type is spatial arbitrage without transferring. This is similar to spatial arbitrage without moving the transactions to different exchanges.
This reduces any risk of transfer times when an investor trades on a different exchange. However, like any exchange, trading fees are most likely to apply.
The third form is triangular arbitrage. This strategy utilizes different forms of crypto on an exchange.
An investor may invest in one form of crypto and use that to invest in a second type of digital asset that is undervalued. To complete the triangle, they then use the second to invest in an overvalued third, then go back and use the third to invest back in the first.
If done correctly, investors can leave that scenario with more potential profit than they started. Still, it can be complicated, especially for those that are not as familiar with crypto.
The fourth form is statistical arbitrage. This strategy is unique because it utilizes mathematical models and arbitrage bots to help search for data and function as automated trading machines.
These models and bots help investors trade in real-time at record-breaking speeds and take advantage of all the data about asset price fluctuations that are available on decentralized exchanges.
In one sense, this is the combination of the other types brought together by a machine algorithm.
As with any strategy, investors must find one that works for them if they want to utilize arbitrage. Some forms, such as statistical arbitrage, may be too complicated for investors to use.
It requires a large amount of coding and mathematics knowledge to begin to use. Statistical arbitrage may be an excellent strategy for those with skills in those areas, not just investing. However, most investors, especially those just beginning, will use spatial arbitrage to help their investments.
Sometimes, the differences in price between exchanges can be significant, while other times, the difference is only minor. For those who just begin investing in crypto, it may be challenging to know the prices for certain crypto forms across different exchanges.
Knowing the price differences is the best way for investors to take advantage of arbitrage. But how can you know the different prices immediately?
Knowing the Exchanges
One way investors can know the difference in price across exchanges is by software. There is always new software that is coming to track prices across exchanges. Some investors even utilize bots that can help them acquire data so that they can have control over risk management.
Investors should utilize these tools to stay ahead of other crypto investors who will also use software to get ahead on the best opportunities.
Another way investors can find a more considerable price spread is by investing in less traded and popular forms of crypto. Sometimes, less-known cryptocurrencies have a significant price spread across different exchanges.
However, the one thing to be aware of with this is that the prices can fluctuate at any moment, making it more volatile than other forms of crypto. This is something for investors to consider since investing in crypto already comes with enough risk.
Though crypto arbitrage is an excellent strategy for investors to use, it does have some potential risks to it. Investors need to know what these risks involve to be prepared for anything that may happen.
Are There Any Risks?
For one, potential losses come with strategies such as arbitrage. Investors must ensure they can sell the asset quickly when they want to utilize arbitrage.
The crypto market changes often, and it may be the case that the asset you bought will decrease in price if you wait too long to sell it. This would lead to a loss in gains, which can be significant depending on how much you spent to acquire the crypto.
Another thing to be aware of is trading volume. The crypto price is always based on the last trade on a particular exchange. Though most crypto exchanges work similarly, not all of them are equal. Some exchanges have a tremendous amount of trading volume, while others have little.
If you want to sell on an exchange with low volume, you may not get the returns you were hoping for. Exchanges with a low volume may not be able to make the trade. If they are, it is also possible that they will take too long to fulfill the transaction, which might lead to a loss in acquiring the pricing opportunity.
Should You Utilize Crypto Arbitrage?
As a crypto investor, you should research different exchanges to know their trading volume so that if you want to utilize arbitrage, you know how to plan it accordingly.
Like the capital market, transaction and withdrawal fees come when investors want to trade and affect the liquidity of crypto investments.
Since arbitrage works by quickly selling an asset shortly after an investor buys it, it may be the case that the trades will come with higher transaction fees. These fees greatly depend on the market, so they fluctuate over time.
One of the hottest topics and issues with crypto right now is the topic of fraud and hacking. Because crypto is unregulated, it is more prone to hacking and fraud. This can lead to an overall collapse of some currencies, leading to huge losses for some investors.
This should be something that all crypto investors know in advance to plan on how to invest and understand the potential risks that come with investing in crypto.
You may be wondering if arbitrage is a good strategy for you.
It depends on what your situation is and what your goals are as an investor.
If you have allocated a certain amount of risk management that allows for potential losses, and you have the time to invest in researching the data on the internet and knowing the differences between different exchanges, arbitrage might serve you greatly as an investment strategy.
However, if you find it challenging to get a grasp on crypto and how to trade it, then it may be best not to utilize arbitrage. Arbitrage has the potential for significant gains but is also susceptible to huge losses. Market prices for crypto change constantly. There is never a guarantee that an asset will be the same price tomorrow as it is today.
Arbitrage offers an excellent way for investors to take advantage of the differences in price for crypto assets across different exchanges.
There is not just one form of arbitrage. Investors should know the different arbitrage types and determine which form will work best for them and their investing goals. No matter the type of arbitrage an investor chooses to use, some requirements will always be for research data.
If an investor does not take time to do research, then arbitrage will be of little to no value for them since other investors are doing that work and will be ahead of the game when it comes to trading.
The best thing for investors to do is to take the time to do their research so that they can use arbitrage effectively. An easy way to do this is through American Crypto Academy.
American Crypto Academy is run by a team of experts, and we’re dedicated to making cryptocurrency and the blockchain easy, with educational resources and professional programs taught by carefully chosen industry professionals.
Check out our blog or check out our other community resources to learn more.
What is cryptocurrency and how does it work? | Kaspersky
Crypto Arbitrage: How It Works & Trading Strategies | SoFi
Crypto Arbitrage Trading: How to Make Low-Risk Gains | Coindesk
Crypto Trading Bots: The Ultimate Beginner’s Guide | Trality