What Is Crypto Arbitrage And How Does It Work?

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What Is Crypto Arbitrage And How Does It Work?

Crypto arbitrage has been around since cryptocurrency emerged in 2009. Yet, there are still many people who do not understand exactly what it is or how it works. Crypto arbitrage is nothing new. It existed in forex and equities markets before it came to crypto. As soon as crypto trading began, so did crypto arbitrage opportunities.

What is crypto arbitrage?

It is a practice where investors trade cryptocurrency for another cryptocurrency to get exposure to a crypto asset, and then immediately sell it back for a profit. This can either be in a single round-trip or in multiple round-trips. Usually, it’s a quick trade between trading pairs, whereas in forex or equities there can be many rounds of trades.

The structure of crypto arbitrage is the same as in forex or equities markets. And there are tons of crypto arbitrage arbitrage traders today. They are the reason why crypto prices are going up and up. But the process behind it is completely different from what you might think.

Due to a variety of factors, such as varying degrees of access to information among market participants, different trading methods and strategies, transaction costs, human psychology, and more, markets, such as stock and cryptocurrency exchanges, are inherently inefficient. These inefficiencies frequently result in price differences between markets for the same asset — for example, a cryptocurrency.

Arbitrage traders profit from price differences by purchasing an asset in a market where it is cheaper and selling it in a market where it is more expensive near-simultaneously.

Crypto trading, in general, is driven by three factors: volatility, liquidity, and arbitrage opportunities. Volatility means that cryptocurrency prices are not stable and often change rapidly. Large volumes mean that there are substantial assets to trade with and make arbitrage trades with. However, the best arbitrage opportunities come when both of these factors are present at the same time — when a cryptocurrency is both volatile and has high trading volume.

Strategies for crypto arbitrage

If you’re interested in crypto arbitrage, here are some basic rules to follow:

  • Make sure that the security you are buying is a legitimate one.
  • First, understand how the securities you want to trade work.
  • Double-check the price on the first listing of the security you’re looking to buy.
  • Sometimes, exchanges list an exchange price for a security and this is only the beginning price and only available for a short period. You should make sure that the price for the same security on other exchanges isn’t significantly different.
  • Sometimes, when one exchange list the security at a higher price than another exchange, the investor may only be trading at the first exchange.
  • Be cautious buying on dark market or private market trading platforms.

Best known crypto arbitrage platforms

Some of the best-known platforms to crypto arbitrage are Binance, Coinbase Pro, Kraken, and Bitfinex; Blackbird bot – OKCoin, Bitstamp, Exchange, Gemini, and Kraken; HaasBot bot – with 20 exchanges like Coinbase, Huobi and KuCoin; Cryptohopper – 12 exchanges including HitBTC, Bittrex, and Bitfinex.

Conclusion

Each day brings us new crypto arbitrage opportunities, which is one of the reasons why crypto arbitrage is so interesting. It is because the opportunities keep coming. Thus, it would be very difficult for most investors to understand every single opportunity. However, there are many opportunities associated with cryptocurrency arbitrage. It might help you to be a little less ignorant by learning about these opportunities.


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