Cryptocurrency Arbitrage

Quick earnings without leaving home, without resorting to crime – the dream of any person. The rise of cryptocurrencies has allowed many people to multiply their capital many times over. Mining, long-term investments, and trading on the stock exchange. Today we will analyze one of the trading methods – cryptocurrency arbitrage.

What is cryptocurrency arbitrage?

Arbitrage appeared long before the advent of the cryptocurrency market, taking place in traditional financial exchanges. However, it was in the crypt that arbitrage began to play with brighter colors. 

Most likely, this is due to the high volatility of cryptocurrencies, which provides more opportunities for speculation. Since crypto is traded around the world on hundreds of exchanges around the clock, arbitrage traders have much more opportunity to find profitable price discrepancies. 

At its core, arbitrage is a type of asset trading in which a trader analyzes differences in the prices of the same cryptocurrency and conducts a series of trading operations with exchanges to profit in the form of a value difference.

How does it work?

Based on the above, a picture emerges: a trader is looking for the same digital asset, sold at different prices, and uses the difference as a profit. 

As in any area of ​​trading, this type of activity involves the development of strategies and tactics leading to profit maximization.

There are basically four ways of crypto arbitrage trading: 

Method 1. Arbitrage between exchanges

The simplest algorithm of work is since different exchanges have slightly different markets and quotes. In the framework of arbitration, this difference just allows you to capture the possibility of obtaining a plus in the form of profit.

For example, buying bitcoin for $19,818 on Coindesk, selling it on the Kraken exchange for $19,835. Of course, in this case, there is almost no profit, but it clearly shows how the method works.

Method 2. Tripartite Arbitration

A type of cryptocurrency arbitrage that uses the price of one cryptocurrency to speculate against another cryptocurrency. This method is used to make a profit by exchanging one asset for another and then selling the second asset at a higher price. The idea is to use the price difference between two assets to make a profit.

Method 3. Spatial arbitration

Includes the purchase and sale of cryptocurrencies in different parts of the world.

One example of a profitable selling country is Japan, where the demand for cryptocurrency is much higher than in most other countries.

Method 4. P2P cryptocurrency arbitrage

The bottom line is to find the most profitable offer to buy the bundle we are interested in, then place an offer to sell at a higher price. The mechanism is seemingly simple, however, exchangers have their own pitfalls and nuances.

Difficulties

Each exchange tries to fight the possibility of arbitrage, as such transactions entail turnover losses. Cryptoasset trading services develop trading strategies that level out the difference in rates, preventing arbitrageurs from speculating on assets.

Of course, the above strategies purely theoretically can bring profit. However, they have long been known to exchange developers who develop their services knowingly insuring themselves against the possibility of arbitrage.

Of course, there are other costs that complicate the possibility of this type of trading. Transaction fees, banking restrictions, and so on.

In addition, the peculiarities of the cyclical operations of arbitrageurs fall into the field of view of the regulatory authorities, namely under the 115th Federal Law (money laundering).