Trading cryptocurrencies may turn out to be very profitable, but their prices on exchanges are unstable, which can cause many problems for people who decide to enter the world of virtual money. Investing in cryptocurrencies often involves a lot of risk and you shouldn’t spend money there that you are not prepared to lose. Are there ways to safely trade coins? Good old arbitration may be the answer to this constantly bothering problem.
What is Arbitration Trading?
Arbitration is the purchase of a good or asset in a market where its price is lower in order to sell it in another market where its price is higher. The person who trades in this way makes a profit in the form of the difference in these prices, and since the buying and selling take place at the same time, he does not bear any risk.
An important issue in arbitrage trading is knowing the prices of commodities on different exchanges. This allows you to take advantage of the gaps created by the imperfections of the current market model.
Cryptocurrency Arbitration
In the world of cryptocurrencies, arbitrage works in the same way as in the traditional market. That is, it consists in buying one cryptocurrency on the exchange, where its price is lower, so that it can be immediately sold elsewhere at a higher price.
Larger exchanges have a lot of liquidity and can therefore affect cryptocurrency prices. It is different with the smaller ones, often the prices there differ because they take a bit more time to adjust. It is this time gap that is used by traders who employ this technique. However, it requires a lot of practice and immediate sale of cryptocurrencies, because delay can be associated with losses.
Arbitration can be performed on one currency by buying it on one exchange and selling it on the other at a higher price, but traders often use more complicated maneuvers that allow them to earn more. One such technique is, for example, triple arbitration. In this case, instead of focusing on one currency, the trader buys 3 digital assets on 3 different exchanges, where he exchanges them with each other. The triangular arbitrage strategy consists of 3 deals. For example, when you have the currencies A, B and C, you first exchange A for B, B for C and finally from C to A. The process is a bit complicated, but now we have many tools that can help us with this. For example, there are mobile applications that convert the gains from triangle arbitration.
Pros and Cons of Cryptocurrency Arbitration Trading
Benefits
Instant profits
Unlike the most popular method of trading cryptocurrency, where it is stored until its price goes up, arbitrage brings the trader immediate profits. In the case of arbitration, the most important issue is time, so with efficient operation, profits appear in the portfolio immediately and you do not have to worry about drops and increases in prices on stock exchanges.
A large selection of exchanges
There are hundreds of cryptocurrency exchanges now, so we have a wide choice. It is also a great chance for arbitrage traders to find the most profitable exchanges between exchanges.
Price volatility
While the volatility of cryptocurrency prices is a trait that makes investors sleepy, it proves to be an advantage when it comes to arbitrage. Large fluctuations bring about differences in prices, which are, after all, the most important issue in this method. Arbitration traders can therefore count on continued profits when trading assets.
Defects
Procedures related to registration on exchanges
Arbitration requires registration and price observation on many exchanges, and the procedures associated with it are often very cumbersome and require time, of which the trader performing the arbitration has little.
Transaction fees
Trading on the stock exchanges is unfortunately not free. When exchanging cryptocurrencies, we must take into account transaction fees, which must also be borne in mind when calculating the costs of arbitration.
Timing
As mentioned before, time is of the essence here. However, there are issues such as transaction verification that are beyond the control of the trader. Such verification usually takes up to a few minutes, but if you are unlucky, this time may affect the success of a given exchange. In the case of arbitrage, the volatility of the cryptocurrency market is, of course, a chance for profits, but in exceptional cases, the market may collapse completely within these few minutes and the potential profit can turn into a loss.
Arbitration trading – what to consider when choosing exchanges
One of the most important issues when choosing are fees that, depending on the exchange, are charged for various activities, such as deposits, withdrawals, and the exchange itself. It is imperative that these costs be taken into account when arbitrating in order for this trade to actually be profitable. Many exchanges limit access to certain functions depending on the user’s location, which is also a very important issue, so before you start trading on a given exchange, it is necessary to read the information about location restrictions.
Summary
Arbitrage trading seems to be a much safer option when it comes to trading cryptocurrencies, but like any other action on the exchanges, it is not 100% risk-free. Arbitration requires skill and a good knowledge of asset prices, which can be troublesome especially for beginner traders. It is a game against time, but it is a very interesting option for people who are interested in immediate profits.
