Did you know that you can manipulate the cryptocurrency markets’ prices and make legal and ethical earning out of it? You can quickly achieve this by taking advantage of the price difference on various platforms and markets. There are dozens of trading strategies in the cryptocurrency industry, which can earn you millions if mastered. One such approach is Arbitrage trading.
The term arbitrage might sound complicated, however, it simply means taking advantage of the price difference of a specific asset in different markets around the world. To help you wrap your head around this, let’s take Bitcoin’s price as an example. 1 BTC might cost $4,000 in the US market on a particular day. At the same time, the price of 1BTC in the Korean market may be $4,100. This price difference introduces a loophole between the two markets.
This is where Arbitrage trading comes in. A trader purchases a bitcoin in the market with low prices, say US markets at a rate of $4,000 and sells it in the market with higher prices, for our case, the Korean exchanges at $4,100. In the process, the trader will make a profit of $100, and the process is repeated.
Unfortunately, things are never as simple as put in the example above. There are very many logistical challenges in place put by companies to limit the loophole. These opportunities are rare and are corrected in a blink of an eye as soon as they appear. Nevertheless, when properly timed and executed, they are a pure gem.
There are two types of Arbitrages opportunities within the cryptosphere. These are inter-exchange and inter-market arbitrage opportunities.
1. Inter-Exchange Arbitrage trading
As the name suggests, these occur between different exchanges in a similar market. There are hundreds of cryptocurrency exchanges worldwide. These exchanges are platforms through which sellers and buyers exchange different cryptocurrency assets.
Each platform list coins on their coin portfolios. The listed assets are traded against each other. ( there are specific base coins, such as bitcoin and Binance, which other currencies are traded against to form trading pairs)
Interexchange arbitrages opportunity develops when different platforms list new coins. Usually, there are price differences of a similar new coin pair on various platforms. This is because coins get listed on different platforms at different times.
Additionally, when coins are listed on more established platforms such as Binance, investors on the platform scramble for it, creating a small shortage on the system hence increased prices. However, the prices of the same pair in other minor platforms that had listed this particular asset will not be affected, therefore creating a price difference between Binance and other platforms. This is a classic example of a listing inter-exchange arbitrage opportunity.
A trader identifies these price differences and buys from the exchange at a lower price and sells on another exchange at a higher cost. You can always compare pairs’ prices using Best Price Explorer from CoinLib.
It is advisable to take into account the trading fees, deposit/withdrawal fees from both platforms, and blockchain network fees before indulging yourself fully in this form of trading. If the trade still bears profit after fee deductions, then it is worth the chase.
Inter-exchange arbitrage has smaller profit margins than inter-markets arbitrage opportunities. Furthermore, the rate of market corrections is high hence shorter windows of opportunity.
2. Inter- Market Arbitrage Opportunities
These depend greatly on the geographical and chronological differences between different markets. As earlier stated, some markets such as the Korean Cryptocurrency Market offers premium bitcoin services (The Kimichi Premium), which pushes the Bitcoin price higher than other global markets.
As the law of arbitrage trading stipulates, you buy in the low priced markets such as the US and sell in the highly-priced markets such as the Korean markets. The Indian market has recently started offering premium services and presents a new untouched field of opportunities.
By this time, you should be wondering why nobody is busy selling this idea in the market. Well, arbitrage trading is not as simple and straightforward as it sounds. Otherwise, every trader would be a millionaire by now.
What are the challenges in arbitrage trading?
1. Cross-country regulations
This is a nightmare for inter-market arbitrage trading. There are many restrictions on non-resident traders. These include withdrawals and deposits, which might require a resident’s bank account. Additionally, some platforms do not admit traders from particular geographical locations in the world; hence, they cannot trade in those markets. Therefore, it is hard to get two platforms from each market through which you can carry your exchanges.
2. Quick Market corrections
Companies monitor any loopholes in the market and their trading systems. Price differences on various platforms are such a loophole, and trading companies take corrective measures minutes after the loop opens. This limits the time one has to execute these trades.
Additional factors, such as international and cross-exchange transaction fees, as well as trading fees, reduce the profit margin significantly.
Cryptocurrency trading is an engaging affair, and one has to be well-versed with all the possible ways of making profits. Arbitrage trading is a rarely explored strategy. However, if you can connect all the dots and overcome all these challenges, then you are sure of making good profits.
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