Arbitrage is a trading strategy that helps investors take advantage of price differences of commodities in different markets and, in the case of crypto, exchanges. Crypto arbitrage involves buying crypto on one exchange and almost immediately selling it on another exchange where the price is higher. Because there are so many players in the crypto market, there are numerous arbitrage opportunities. The good news is that you do not need to be a professional investor or have a complicated setup to get started.
Understanding Arbitrage Trading
Arbitrage has existed in traditional financial markets for a very long time, long before cryptocurrencies were a thing. Arbitrage trading is possible in the crypto market because of how volatile some currencies therein are.
This volatility means there will be price discrepancies on certain exchanges and in certain markets. This gives those who are savvy enough to make low-risk gains a good chance of making money. The fact that cryptocurrencies are traded 24/7 around the globe ensures there are ample opportunities for gains through crypto arbitrage.
All one needs to do is spot the difference in the price of digital assets in different markets or exchanges and complete a series of trades and transactions to profit from the difference. Because of how fast everything moves in the crypto world, one of the best ways to not miss out on potential profits is through the use of a crypto arbitrage bot.
A crypto arbitrage bot helps you automate crypto trading and therefore take advantage of arbitrage trading. These bots also implement different strategies depending on your needs and how you want them to handle trades and your portfolio to behave.
What Causes Price Crypto Differences?
Because crypto arbitrage depends on price differences it is important to understand why these differences exist in the first place. One reason is differences in centralized exchanges. Because different exchanges have different trade volumes, the demand for digital assets on different exchanges is different and this can lead to price differences.
The second reason is how prices are set. Many exchanges use the latest transaction to determine the real-time price of a digital asset. The next trade will determine the new real-time price and so forth. This continuous process of price discoverability and adjustment can open up arbitrage opportunities.
The third reason is decentralized exchanges. Decentralized exchanges rely on liquidity pools to determine the price of a digital asset. These pools are linked to a crypto trading pair. If one of these digital assets is removed (bought), the other has to be added. This causes a difference in the ratio between the two. The exchange has to lower the price of the second asset so more of it can be added to maintain the pool.
Advantages of Crypto Arbitrage
Understanding all this, what are the advantages of arbitraging? These advantages include good profits for those able to better take advantage of the system, lots of opportunities due to the abundance of digital assets and low competition because crypto arbitrage is just taking off.
Crypto arbitrage is a great way to make low-risk gains for traders who want to take advantage of this trading system. Automating the process can also allow traders to have a hands-off approach to making these gains in the market.