Crypto trading has become quite popular in recent years. For sure, it has both advantages like a possibility to get a big profit, and disadvantages – high risks, volatility of the crypto, fees, etc. Nevertheless, crypto trading has already won the hearts of crypto enthusiasts. Every day it attracts new users – even a novice crypto investor can easily enter the field. Among the types of crypto trading, there are 5 most common: arbitrage, bot trading, swing trading; scalping; day trending. Today we will talk about the arbitrage type and discuss its features.
What is arbitrage crypto trading?
Traders can make a purchase on one crypto exchange and sell the same token on the other. That's what arbitrage is. For example, if a crypto trader purchases a Dogecoin () token at a nominal price of $0.07 on the BINANCE exchange and sells it on the EXMO exchange at a price of $0.1, then he will have a profit of $0.03. Its seems little, but if you do that with a bigger amount the result would be more exciting.
An arbitrage strategy might be a good decision during a period of high volatility on the market, when the rate jumps every minute, and you can easily notice the difference in prices on various exchanges. During the period of market stagnation (crypto winter), such a financial policy won’t be there.
Types of arbitrage crypto trading
Arbitrage trading in the crypto sphere is divided into 3 types: spatial, cross-exchange and triangular arbitrage.
- Spatial arbitrage
The principle of operation of spatial arbitrage can be described in four simple steps:
- Step 1. Buy crypto at the lowest price;
- Step 2. Transfer the tokens to the second crypto-exchange. Don’t forget to analyze the rate in advance;
- Step 3. Sell the cryptocurrency at a higher price;
- Step 4. Make a profit.
Always take into account the commission that is charged for withdrawing crypto from the exchange account and for exchanging currency. Also, during the periods of abnormally high volatility, traders should refrain from risky transactions, as the risk of losses increases. Bitcoin and Ethereum transactions might be carried out slowly, sometimes the data processing time exceeds an hour! During such a period, the price of an asset can change and cause damage to the investor's wallet.
- Cross-exchange arbitrage
The easiest kind of arbitrage trading. Users can get income by buying crypto on one exchange and selling it on another exchange, as we explained in the example above.
- Triangle arbitrage
Triangle arbitrage in crypto trading suggests the resale of cryptocurrencies within one exchange. It is a process of moving funds between three or more digital assets on a single exchange to capitalize on the price discrepancy. For example, trader exchanges BTC to ETH, then he buys
LTC with ETH and sells LTC for BTC.
There are 2 factors that directly affect the operation of triangle arbitrage: transaction speed and price liquidity. A trader has to quickly analyze information about the price of assets and calculate transactions in oder to be successful.
Arbitrage crypto trading is called a strategy with minimal risks. This often explains its popularity among young entrepreneurs. When working with arbitrage, investors may not take into account market risks. For them, only the basic risk is significant - the loss incurred due to the fact that the price of the token fell during the transfer from exchange to exchange. There can be many reasons for long transactions. These are, for example, a failure in the operation of the exchange, communication problems, a human factor, etc. It is extremely important to make transactions quickly, while there is a positive difference in cryptocurrency rates for the trader.
Thus, cryptocurrency arbitrage might be a very profitable business in good hands. You can learn it by experience, starting with small transactions. It is important for a crypto trader to understand the mechanism of the strategy, to face the risks and go through all the "pitfalls" that one way or another arise in working with the exchange rate.
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