The first cryptocurrency, Bitcoin, debuted in 2009, and nobody paid much attention to it. It didn’t make much of a ripple; it wasn’t worth much. In certain internet forums, bitcoins were used to award comments that were ‘good.’
But despite that inauspicious start, the idea of virtual coins caught on. Several cryptocurrencies were created after Bitcoin, but until a few years ago, no serious mainstream investors paid heed to them. They were deemed too exotic, and very few people understood them.
Those who invested in them at the beginning did it mostly for novelty. However, over the past decade, cryptocurrencies have gradually become a major force in finance. Cryptocurrencies today are a USD$2 trillion industry. As for the number of cryptocurrencies that sprung up after Bitcoin, there are now over 10,000 of these virtual coins. Cryptocurrencies are now mainstream, and many investors have accepted them as among the assets included in their various trading strategies—including arbitrage trading.
What Is Arbitrage Trading?
Arbitrage is a type of investment or trading strategy where an investor buys an asset in a market and sells it in a different market to profit. Price differences between markets may be minor, but the returns are nothing to sneeze at when done in large volumes. This strategy is a common practice of savvy investors and is among the oldest trading strategies.
Arbitrageurs take advantage of these price differences in different markets; they buy an asset from one market and sell it to a different market at a higher price. For example, Bitcoin sells at USD$39,100 in XYZ exchange, while the same crypto sells at USD$39,200 in ABC exchange. An investor dealing in Bitcoin arbitrage spots this difference and immediately purchases Bitcoins on XYZ exchange and sells them on ABC, netting a profit of USD$100 for each Bitcoin.
How Does Crypto Arbitrage Works?
As you may have surmised, crypto arbitrage trading works if you can immediately spot the price discrepancy in different markets; you have to buy and sell quickly to take advantage of this price discrepancy. Some investors find it advantageous to use trading bots like Pionex when doing crypto arbitrage. Bots can be more efficient than humans in keeping track of prices in various crypto exchanges.
As Bitcoin and other cryptocurrencies are highly volatile, price discrepancies happen. Prices can easily differ from one crypto exchange to another. For example, a few years ago, Bitcoin’s price was more than 40% lower in South Korea than US Bitcoin prices. This price discrepancy led to a rush of Bitcoin purchases in Korean crypto exchanges which were sold in other exchanges at a higher price. More than a few fortunes were made in this instance of crypto arbitrage trading.
Success at crypto arbitrage means you’ll always be on the lookout for opportunities. Once you spot one, you have to move quickly. Make a note in your order book of how much you can make in the transactions, and execute your plan. Keep in mind that it could take around 20 minutes for the crypto transactions to be confirmed. If the price drops within the time frame, there’s a risk you could get less arbitrage on the transactions.
Is Crypto Arbitrage Trading Risky?
When doing arbitrage, check your analysis of the price listings on the different exchanges. Take note also of the trading volumes. As mentioned earlier, you can find programs or bots to do the work for you—that’s always an option. But, as with other things, risks are always there. Foremost is security. Engaging in crypto arbitrage means you also have to open accounts at different exchanges.
There are incidents of crypto exchanges being hacked. Having accounts at several exchanges, therefore, could expose you to hackers. To lessen this risk, open accounts on reputable exchanges.
Crypto arbitrage trading, however, is less risky than the other investment strategies. An arbitrageur buys an asset in one market and simultaneously sells it in another at a higher price—this situation creates an opportunity for a risk-free profit, if you can spot opportunities like these immediately.
Trying Your Hand At Crypto Arbitrage Trading
There are a few things to remember before jumping into crypto arbitrage. First, you have to take into account how much funds you’ll be using. As there’s really no requirement on how much an investor can spend on arbitrage trading, you can set aside any amount you want.
Next, you have to set up a digital wallet to store your cryptos if you don’t have one already. You can also use your digital wallet for sending and checking your funds. Some platforms offer free digital wallets when you open an account with them.
Your next move would be to begin looking for reliable cryptocurrency exchanges. As of May 2022, there are almost 600 crypto exchanges in the world. So, choose carefully—you wouldn’t want to be associated with sketchy crypto exchanges.
Check if the exchanges are reputable, if there are any complaints from other investors, and if they comply with regulations regarding digital assets. Check also a few online crypto user communities like r/CryptoCurrencies and others on Reddit for any recommendations.
Crypto arbitrage trading means simultaneously buying cryptocurrencies in one market and selling them in another market at a higher price, resulting in a low-risk profit. However, you have to do your homework—you have to keep track of the prices of various cryptos in different markets.
You can use programs or bots to do the heavy lifting for you, but that doesn’t mean you have to rely on them totally. Traders should also do their research and take the necessary precautions to avoid being involved with untrustworthy crypto exchanges.