Analogy 1: "Buy a sweater for $50 on store A and sell it to store B for $100"
Analogy 2: "Arbitrage trading is like dropshipping crypto on different exchanges"
Crypto arbitrage is a relatively low-risk way of making money by buying an asset at a lower price on one exchange and selling it at a higher price on another. The difference between the selling and buying price is your profit.
The idea of arbitrage has been around for quite some time in traditional markets. However, cryptocurrency offers a different way of arbitrage trading opportunities since the market is open 247. Also, some traders have access to crypto exchanges in various parts of the world.
There are approximately 500 cryptocurrency exchanges in the world. Each has its own order books and the price of an asset depends on the most recent bid-ask matched order.
Although the price discrepancy among exchanges is quite minor, they sometimes have lag times or differ in their price reaction times according to the interest of the investors on their platform.
If you work with high-volume trades and qualify to sign up for exchanges offering competitive transaction and transfer fees, you might come across lucrative crypto arbitrage opportunities.
Is Crypto Arbitrage Profitable?
Crypto arbitrage is considered profitable. However, since the price difference in exchanges is usually small, this trading strategy is most profitable when you have a large sum of money to invest.
Using an arbitrage strategy is relatively low risk and low-risk investments come with lower rewards. Therefore, people with small bankrolls might not feel that the money they can earn from arbitrage is worth it.
You can use arbitrage trading strategies on both centralized and decentralized exchanges. However, trading on centralized exchanges involved waiting for your order to be filled through an order book.
Decentralized exchanges on the other hand execute right away since you’ll be trading from a liquidity pool.
Types of Arbitrage Trading Strategies
1. Triangular Arbitrage
This involves buying and selling three or more cryptocurrencies for profits without having to exit an exchange.
Triangular arbitrage is ideal for people who have limited choices for cryptocurrency exchange due to their country of residence.
An example of this type of trading is buying Bitcoin and exchanging it for Litecoin and Solana before converting Solana back to Bitcoin.
Any price changes along the way will add up and get you more Bitcoin if the trade works in your favor.
2. Cross-exchange Arbitrage
This method is the classical type of arbitrage. Here, you will identify a currency selling for a lower and higher price across two different exchanges.
If you purchase at a lower price and sell it where it sells higher, you can make a profit.
3. Spatial Arbitrage
Spatial arbitrage works similarly to cross-exchange arbitrage. The only difference is that you will buy and sell your crypto exchanges that are in different parts of the world.
4. Bot Arbitrage
Arbitrage trading can be time-consuming since you have to look for price discrepancies across multiple exchanges. However, by using a bot program, bots can automatically scout out and execute arbitrage opportunities on your behalf.
Is Trading Profitable with Bots?
Bots have the potential to make crypto arbitrage more consistent and profitable but you will have to decide if it’s worth the cost of the bot, the inherent risk of using one, and the time it takes to supervise it.
However, you don’t need a bot to perform arbitrage trading. Bots just make the strategy more convenient for you.
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