January 31, 2023

What is Crypto Arbitrage Trading?

3 min read
crypto arbitrage

The cryptocurrency market is now starting to enjoy the same opportunities that used to be reserved solely for the traditional financial sector. Aside from leveraged trading and futures, arbitrage trading is getting more attention thanks to the different opportunities it offers. To be more specific, crypto arbitrage trading is gaining popularity with traders using the tool to open doors to more opportunities to earn returns and profits in the world of cryptocurrency. But, what is crypto arbitrage trading in the first place?

Crypto Arbitrage Trading at a Glance
As of the moment, there are over 300 cryptocurrency exchanges around the world. The cryptocurrency prices of a similar coin differ between exchanges because of the different liquidity and volumes of trading. To make the most out of these price differences, a trader buys a coin from a particular exchange then sells this on another exchange.
For example, a trader buys one Bitcoin at a price of $11,100 from exchange X then sells it at exchange Y where one Bitcoin is priced at $11,500. The trader earns a profit of $400 without doing much effort on his part.

Opportunities for crypto arbitrage can offer more profits to the traders. There was a recent surge in interest in cryptocurrencies and this growth resulted in the subsequent increase in the cryptocurrencies’ trading volume. With exchanges not having direct connections to each other, it is possible for traders to strategically leverage the opportunities in crypto arbitrage.

Aside from that, due to factors such as the devaluation of flat currency, hyperinflation in flat currency, and political unrest, cryptocurrencies such as Bitcoin are now trading at notably premium prices. In addition to these events, a degree of difference in price will always be present in a similar cryptocurrency between two exchanges.

Different Opportunities for Crypto Arbitrage Trading
Below are the three most popular opportunities for crypto arbitrage trading:

Statistical Arbitrage
Statistical arbitrage involves the use of modern technological algorithms and tools to leverage the discrepancies in price between two cryptocurrency assets. An emerging and popular way of statistical arbitrage is with the use of crypto trading bots.

Spatial Arbitrage
Spatial arbitrage is simplest method of extracting benefits through crypto arbitrage trading. This involves trading similar cryptocurrency over a couple of different exchange platforms. This is where the trader purchases cryptocurrency from a certain exchange then sells it at a different one that offers higher rates for the coin’s price.

Triangular Arbitrage
The triangular arbitrage strategy is performed on a single exchange platform. This is a method where the trader uses the difference in prices of the trade pairs. In just one exchange platform, the trader can convert BTC to ETH then ETH to XRP and finally XRP back to BTC to make a complete triangular loop. This is where the trader earns profits through exchanging these trade pairs.

Crypto arbitrage trading is an up and coming strategy to help traders extract more returns when trading crypto assets. However, it is recommended to conduct thorough research and due diligence before you decide to invest in the market.

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