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What is cryptocurrency trading? How it works?

There are different strategies for cryptocurrency trading. The most famous are those used for trading the cryptocurrency market, such as day traders. Other strategies do not require the high level of expertise that day trading does.


Cryptocurrency arbitrage trading is one such strategy that does not require high level trading skills. However, it is not “simple” and requires some knowledge of the cryptocurrency markets. So, how does arbitrage trading in cryptocurrency work?


What is cryptocurrency trading?

If you visit two or more exchanges around the same time, you may have noticed that the price of Bitcoin is not the same on all of these exchanges. Instead, the price on one exchange is higher or lower than the other.

This phenomenon is present in every market, whether it is stocks, commodities or metals. It is also present in the cryptocurrency market, hence the origin of cryptocurrency arbitrage trading.

Crypto arbitrage trading is a cryptocurrency trading strategy that involves buying and selling crypto assets and taking advantage of price differences on competing exchanges to make a profit.

Arbitrage is a strategy that anyone who is able to buy and sell crypto assets on exchanges can use to make a profit. It is also generally a low risk trading that requires little or no trading experience.

How does Crypto Arbitrage trading work?

Arbitrage trade centers around the buying and selling of crypto assets from one exchange to another. Basically, you buy Bitcoin on exchange A, where the price is lower, and sell on exchange B, where the price is slightly higher.

To get a better picture of what we’re saying, visit CoinMarketCapand select Bitcoin to see the differences in price on different exchanges.

At the time of writing, the price of Bitcoin on Binance is $20,141, while on Huobi Global, it is $20,130. So if you buy from Huobi Global and sell on Binance, you will earn approximately $11 on every bitcoin.

Note, however, that because the cryptocurrency market is so volatile, the trade must take place very quickly, roughly simultaneously, before prices change again. This may not be an issue with some types of arbitrage trading, as we will soon see.

However, volatility is not all bad, as it makes arbitrage trading opportunities more abundant in the cryptocurrency market than any other.

4 types of cryptocurrency trading

There are many types of cryptocurrency arbitrage, depending on how the arbitrage is conducted and the parties involved. Here are the four main types of cryptocurrency arbitrage.

1. Arbitration between stock exchanges

This is the type of arbitrage trading in which you simply buy from one exchange and sell on another. It only involves two exchanges.

Since arbitrage trading of this type is based on real-time asset prices, it is impractical to buy assets on one exchange and transfer them to another to sell them.

You can get around this and transaction fees by simultaneously buying and selling the asset. This is possible if you hold assets in both exchanges.

Let’s say you own 20,000 USDT on Binance and 1 BTC on Kraken.

If Bitcoin is worth $20,300 on Kraken but equals exactly $20,000 on Binance, you can take advantage of this opportunity by buying Bitcoin on Binance with $20,000 USDT while simultaneously selling Bitcoin on Kraken at $20,300.

Once this is completed, the spread of $300 becomes your profit, and you do not have to pay deposit and withdrawal fees to transfer bitcoins from Binance to Kraken or vice versa.

2. Triple Arbitration

This type of arbitrage trading is a bit easier because it takes place on one exchange, even though it involves three different assets.

Suppose you own Bitcoin, Solana, and Ethereum. If the last two assets on the exchange are undervalued, you can use this arbitrage opportunity to get more Bitcoin.

For example, you can use your Bitcoin to buy Solana, and then use your Solana to buy Ethereum. Finally, you use Ethereum to buy Bitcoin again, and that’s it.

You’ll end up with more Bitcoin than when you first bought Solana, and without sending Ethereum to another exchange and paying high gas fees.

Since it’s all done on the same exchange, there are no withdrawal, transfer or deposit fees.

3. Statistical arbitration

This includes using mathematical models to trade assets and profit from spreads. Statistical arbitrage also uses arbitrage robots, which are able to trade hundreds of assets at the same time.

The robots use mathematical models to predict whether a trade will be a profit or loss and trade based on the prediction.

Since robots are involved, the process is primarily automated rather than manual, so there’s not much to do. This makes it more convenient while reducing the risk of making mistakes.

4. Spatial Arbitration

This type of arbitrage trading takes advantage of differences in the price of an asset based on differences in the geographical locations of each exchange. It is very similar to the arbitrage between the exchange, apart from the spatial aspect.

One factor that drives spatial arbitrage is variations in the demand for an asset. For example, if you live in a country with a high demand for Bitcoin, you can buy from an exchange based in another country where the asset is in lower demand and sell on the local exchanges in your country.

This will make you earn instant profit as higher demand means more bitcoins will be worth. Although this sounds like arbitrage between exchanges, you do not have to buy and sell based on real-time prices, so you can buy from one exchange and manually transfer to the other to sell to make a profit.

Pros and Cons of Crypto Arbitrage Trading

Crypto arbitrage trading has its good and bad sides, as you might expect.

Positives

  • Low risk trading strategy that requires little experience
  • Can be done during low and high volatility
  • Not many fees are included in most arbitrage trades

Negatives

  • Volatility causes rapid changes in price, which can be a challenge in arbitrage between exchanges
  • May require assets on at least two exchanges

Is cryptocurrency trading right for you?

Cryptocurrency arbitrage trading can be very profitable if done correctly. It also has very little or no risk, compared to day trading, for example, which involves trading actual market movements.

If you have the assets to trade and meet the conditions of any of the above arbitrage trading methods, it is definitely worth a try.

The information on this website does not constitute, and should not be considered, financial advice, investment advice or trading advice. MakeUseOf does not advise on any trading or investment matters and does not advise that any particular cryptocurrency should be bought or sold. Always perform your own due diligence and consult a licensed financial advisor for investment advice.

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