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Arbitrage is the ability to take advantage of price differences between marketplaces for profit. When the same product or financial asset is available at different prices, there are gains to be made. Investors looking to minimize risk are always looking for arbitrage.
Risk averse individuals who engage in arbitrage create tools and methods to hunt down potential opportunities. Known as arbers, these investors cherish the chance to make a percent or two on a trade over and over again.
However, the more volatile a market, the greater the potential for profit. According to crypto arbitrage experts at SoFi, an example of this potential is illustrated in the following historical case:
Famously, in 2017 there was a time when the price of Bitcoin on Kraken was $ 17,212, but only $ 16,979 on Bitstamp, which represented an arbitrage opportunity. In this case, an investor could potentially earn $ 233 per Bitcoin by buying them on Bitstamp and then quickly reselling them on Kraken.
So what is crypto arbitrage?
Crypto arbitrage is the ability to simultaneously buy and sell cryptocurrency on two different exchanges for profit. In a volatile space such as crypto, arbitrage opportunities can be more profitable than in other asset classes.
How does cryptocurrency arbitrage work?
Cryptocurrency arbitrage works by buying a cryptocurrency on one exchange and simultaneously selling it on a second exchange at a higher price. Newbies to crypto-arbitrage should have a good understanding of how space works as there are several moving parts.
When trading, crypto investors often use stablecoins to lock in their profits in an ever-changing environment. Stable coins are cryptocurrencies that have a fixed value, often set at a dollar. By using a stable room, the investor makes sure not to get the carpet pulled under him.
For example, buying $ 10,000 worth of Bitcoin on one exchange and selling it for $ 10,500 on another will yield a profit of $ 500 with the use of a stable coin.
What are the types of crypto arbitrage?
There are two main types of crypto arbitrage that traders can use. The first is arbitrage which takes advantage of price differences between cryptocurrency exchanges.
The second type is called triangular arbitrage. It is the one that can occur on a single exchange. This method involves taking advantage of three different cryptocurrencies as they fluctuate on the exchange.
Is Cryptocurrency Arbitrage Profitable?
Cryptocurrency arbitrage is one of the most profitable types of financial arbitrage because the price differentials between cryptos can be quite large. However, as with any other type of arbitrage, time windows do not stay open for long.
Investors who trade on the stock exchange are aware of the concept of floating stocks. This involves knowing the number of shares currently available for trading. With arbitrage, float is of the utmost importance depending on the size of the trade desired.
In crypto arbitrage, the trader should be aware that when executing side trades that will generate profit, that the amount of crypto is available for purchase at the target price.
In the example above, if the arber buys $ 10,000 of BTC at $ 50,000 per coin, he should be able to sell his BTC at $ 52,500 per coin for a profit of $ 500. How much BTC is available on the exchange priced at $ 52,000? If this is not enough to complete the arbitrage, the investor may end up with a loss.
Is cryptocurrency arbitrage legal?
Yes, cryptocurrency arbitrage is legal. As long as an investor is allowed to buy cryptocurrencies where he lives, he can engage in arbitrage.
Benefits of crypto arbitrage
The biggest advantage of crypto arbitrage is that it involves minimal risk. With hundreds of crypto exchanges and thousands of cryptocurrencies available, the opportunities are virtually endless.
Disadvantages of crypto arbitrage
While the concept of arbitrage involves zero risk, obstacles like slippage and fluctuating transfer fees can eat away at profit or even turn into a loss if arbitrators are not careful. In addition, there is increasing competition in the arbitrage space as more and more investors seek to profit from it.
Important things to know before trying it
Before trying arbitrage, it is important to fully understand how cryptocurrency trading works. It is also essential that arbitrators have the tools to find and execute arbitrations quickly and efficiently.
Trusting a trusted expert like SoFi can help investors overcome the learning curve and make their journey more profitable.
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