How to start gaining from crypto arbitrage trading: A beginner’s guide

You must be familiar with the buy-sell process that comes with crypto trading. The golden promise offered by ‘established’ investors states that if you buy low enough, then eventually, when the market moves up, you can sell high. Although this is a proven approach, it is usually a long term one, especially in a market as versatile as the crypto market. What happens if the market takes some time to recover from the previous crash? Some investors will tell you the wait isn’t that long, but there are no guarantees in the crypto trading market. There is no harm in using multilayered strategies. A diversified investment portfolio with short, medium, and long-term goals is not just brilliant, but it is absolutely essential for investors.

Crypto Arbitrage trading is a sure way of making low-risk gains on your crypto investments by taking advantage of the constantly fluctuating prices in different markets or exchanges. The strategy involves buying cryptocurrencies from one exchange and selling them almost instantly to another exchange, thereby gaining from the difference. Most exchanges have their own values for their various crypto assets. This could be due to a lot of reasons. Does it sound complicated? Don’t worry. It is a low-risk strategy that doesn’t require you to have a PHD to understand. This article talks about what it is, how it works and how you can gain from it.

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What is Crypto arbitrage trading?

Crypto arbitrage trading is actually a pretty old concept. You’ve probably heard stories of people travelling to far off markets to buy goods like tomatoes, plantains etc., at low prices and coming back home to sell at a much higher price in their local market. These traders take advantage of the difference in prices in different markets for the same assets. That is arbitraging.

Does this system work in the cryptocurrency industry? Of course, it does. Arbitraging has been used by the finance industry for decades and has been an effective way to make profits. The crypto industry is known for its versatility. Internet connectivity allows us to connect or trade with people all over the world, allowing for ample opportunities for crypto arbitrage investors. Prices will rise and fall over time and that’s why Crypto arbitrage treading works.

“Bigger exchanges can offer better prices, whereas smaller exchanges have to try and compete with them to offer something similar. But these prices depend on supply and demand so that smaller exchanges may actually be more stable.” — Zipmex.

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Is Crypto arbitrage trading worth it?

When it comes to Crypto Arbitrage trading, information is critical. The difference between most prices on smaller and more prominent exchanges could be past 2% to 10% on specific cryptocurrencies. If you try around ten or more trades per day, the profits could range in the thousands. Of course, this isn’t the case with all types of arbitraging, and we would go into the various types below.

It cannot be stressed enough how much information is primary when performing arbitraging activities. Dedication and Persistence could really define the progress and gains for an early trader. Most day traders keep different platforms and tools to keep them informed on the market’s day-to-day progress. Currencies like Bitcoin with already high trade volumes are also traded with this system.

Why do crypto exchange prices differ?

Many factors could result in price discrepancies between exchanges. For example, the system that the crypto exchanges use to define the price of an asset. For some centralized exchanges, the most recent bid for an asset sets a standard for how much the investment is worth at the time. This real-time price sets a standard for traders buying and selling on the platform.

Decentralized exchanges, however, use a different system in defining the value of an asset. The system is called Automated market makers or AMMs for short. The crypto exchange system depends on liquidity pools or arbitrage traders to keep the price in check. This results in the differences in price of a single asset across various exchanges.

Is this legal?

Don’t worry. The EFCC or FBI isn’t going to come knocking. Crypto Arbitrage trading is entirely legal. It is simply taking in the difference in price between different exchanges and pocketing it. On rare occasions, such differences could even climb up to 20%.

Types of crypto arbitrage trading

There are several techniques or strategies Crypto Arbitrage traders use, such as:

• Spatial arbitrage: This is the most commonly used strategy for crypto arbitraging and has been the main focus of this article so far. It is a cross-exchange system that involves buying and selling crypto assets on exchanges in different regions. It follows the traders who travel to buy goods example we mentioned earlier but with crypto. For example, traders could buy in small or big crypto exchanges in Nigeria and sell to other crypto exchanges in countries like America or South Korea with this crypto arbitrage system.

You could try the Spatial technique in real-time. Just set up your account and start trading. Click here to begin.

• Triangular arbitrage: This is moving funds between three or more exchanges to capitalize on the price disparities of different cryptocurrencies. It’s very similar to Spinal Arbitraging but involves more crypto exchanges.
• Statistical arbitrage: This involves using bots or other trading machines to perform economic and statistical computation to execute a trade at large scales. It relies heavily on statistical data that has been set on a predetermined strategy to ensure maximum gains in the market.
• Decentralized Arbitrage: This is done in decentralized exchanges or exchanges that use the automated market makers systems(AMMs) in determining price. Crypto Arbitrage traders can then buy pooled digital assets that are over or undervalued and sell in centralised exchanges or any other platform they see fit.

The pros and cons of crypto arbitrage trading

Although Arbitrage trading isn’t as high risk as most other strategies, it is not a perfect approach and comes with its fair share of ups and downs.

Pros

Wide range of opportunities: The crypto industry is one of the fastest evolving industries out there. There are a lot of exchanges for crypto arbitrage traders to choose from. The number gets bigger every day, so there will always be ample opportunities to make a safe passive income from it.

Less risk: Although it has its risks it’s still less risky than the long term investment options and a more sure way of making a profit off cryptocurrencies.

Quick liquidity: There is almost zero wait time for arbitrage trading. Most gains can be seen within a couple of hours. Thereby making it amongst the more liquid investments opportunities out there.

It is a fast-developing market: This is one of the most volatile markets out there. Although some crypto activities like Bitcoin trading started around 2009. it has grown significantly since then and has created ample opportunities for those invested in it.

Cons

Fees: Since this is mainly done between two or more changes, a transaction fee might be attached to each exchange. These fees reduce the total profits that could be gained with each trade. The exorbitant fees could almost total the arbitrage gains sometimes. One way crypto arbitrage traders have been able to combat that is by depositing funds on multiple exchanges and reshuffling their portfolios to take advantage of market inefficiencies.

Timing: Crypto arbitrage trading is time-sensitive and requires any trader to spend significant time observing the differences between markets; otherwise, they might disappear before making a trade. For example, if two traders buy at different prices, say N2,000 and N2,100, then they go off and sell on another exchange for N2,500 and N2,300. Due to the price disparity, the less costly one would go off the market first, putting the more expensive bid in a position to either lower the bid price or wait it out. If the price is lowered, the next bidder might do the same until all offers are eventually aligned. So, getting the first bid up and on time is paramount.

Security: Transferring crypto assets from one place to another is considered risky. As well as making such trades in less than ideal platforms.

Conclusion

Crypto arbitrage trading offers several techniques and strategies for great success. However, you need to be quick and vigilant as a trader, since these opportunities could disappear as soon as they appear on various platforms. It is necessary for this to happen in order for the prices to be stabilized between different exchanges.

Although transaction fees could really frustrate a trader’s efforts. However, Valorexchange provides the best prices on BTC, ETHER and USDT with no fees per transaction. In addition to offering plenty of opportunities for buyers and sellers, we are a secure P2P exchange platform. Click here to start your journey.