A simple definition of crypto arbitrage trading involves the process of buying a cryptocurrency on one exchange and immediately selling it on another exchange, where the price is higher than your initial purchase price on the first exchange.
Therefore resulting in a successful profit where identified market inefficiencies exist in different cryptocurrency prices between different crypto exchanges.
For example, a cryptocurrency is priced at $51 on one exchange but is available for $52 on a different exchange. It may seem like a small profit margin, but if you make a bulk purchase of the cryptocurrency at the lower price and immediately sell it on the exchange with the higher price – well, you get the idea.
Profiting from crypto arbitrage can be nearly risk-free if you can identify and capitalize on the opportunity immediately.
What Trading Methods Are Used in Crypto Arbitrage?
There are three methods of trading in any arbitrage scenario:
1. Spatial: This method is the most common and was discussed earlier – taking advantage of the difference in cryptocurrency prices from one exchange to the next.
2. Cross-Border: This method is defined in the name. It involves taking advantage of marketplace price discrepancies in different countries, outside your own, due to different time zones and market data updates.
3. Statistical: This method carries the most risk. It involves using high-tech mathematical algorithms to identify price discrepancies that may only exist for very short periods of time.
What Are the Risks Associated With Arbitrage Trading?
As with any form of arbitrage trading, the legal and financial barriers set in place can make it difficult to profit.
For starters, most trading platforms will charge you fees for each trade – and sometimes for each withdrawal to your bank account. These factors will be essential to consider when creating finding successful crypto arbitrage opportunities.
Cross-border arbitrage can be very profitable, but you have to overcome legal issues involving proof of identity by providing a valid government-issued id or similar document to the exchange of your choice.
Always perform your due diligence and always read more when looking into new exchanges and trading software platforms.
Trading in the Cryptocurrency Markets
Crypto arbitrage is an entirely legal way to exploit price discrepancies in the crypto marketplaces. The more experience you gain in the market — the higher levels of success you will achieve.
With the growing presence of trading platforms that are borderless and able to directly connect buyers and sellers, your opportunities for profitable arbitrage will continue to grow.
Still interested in more ways to invest and save your money? You can find that information in the finance section of our Money plans blog.