Crypto
trading has long been making some traders hefty sums of profits. However,
trading cryptocurrency comes with its fair share of risks.
The past
year started off with a bang and every crypto asset witnessed new all-time
highs. Unfortunately, 2018 ended with a
whimper after the crypto market was dominated by the bears year around and the
digital currencies fell back to their lowest in 18 months. Even Bitcoin
following one of its biggest bull rallies to $19,500, dropped down by 80 per
cent by the year-end.
2018 was a
testimony to the fact that digital currency can swing wildly and nobody can
know the market for certain.
This is
where the concept of arbitrage trading comes in. If you are an investor or
perhaps a digital currency enthusiast, the term arbitrage exchange may sound
familiar. The concept holds many a trader's fixation since it is one of the
best ways to make money trading Bitcoin quickly and with minimum risk.
Arbitrage Exchange in a Nutshell
Arbitrage
exchange is a popular trading strategy wherein you exploit the difference in
the price of the same asset on different exchanges. The approach allows
pro-traders to make profits from discrepancies between exchange rates.
Looking at
the Bitcoin arbitrage trading, it involves buying and selling Bitcoin
simultaneously to make a profit from the difference in price on different
exchanges.
For
instance, suppose Bitcoin is listed for $9000 on exchange A, while exchange B has
a Bitcoin price of $9150. You can buy Bitcoin on the cheaper exchange and
simultaneously sell it on the more expensive exchange to make a profit.
Quite
simple, right? Undoubtedly arbitrage exchange trading is an excellent
opportunity to make generate passive income, but it has risks too.
Arbitrage
trading is quite prominent in the crypto market. According to CoinMarketCap, there are a total of 227 exchanges
globally (at the time of writing this article). As a result, the market is
brimming with opportunities to take advantage of arbitrage trading. However,
there are a few factors that one must consider in order to benefit from
arbitrage exchange trading.
Each
transaction requires verification, which costs precious time during which rates
might fluctuate. Since the buying and selling has to be done simultaneously,
time is of great essence. Furthermore, many exchanges have a lengthy
verification process when it comes to trading a large number of Bitcoins.
Several
crypto exchanges charge a certain fee that you must take into account while
trading. There are centralized exchange fees and transaction costs that you
must examine before executing trades to maintain profitability.
For
arbitrage trading, you must maintain liquidity of at least 10-1 on both sides.
Meaning, if the trade requires 0.1BTC, it's essential that you have a balance
of minimum 1BTC on both the exchanges.
Effective Strategies to help you jump
on arbitrage opportunities
Typically
profitable trading boils down to settlement speed, execution, transfer times,
and some other outside factors. Considering the volatility of the crypto space,
it wouldn't be wrong to say that there is a significant possibility of an
excellent opportunity vanishing in seconds and even the trader to lose money.
However, some strategies can help you take advantage of the arbitrage
opportunities when they arise.
1. Preparation is the key
Considering
the impact of time delays while trading, it's crucial to stay prepared so that
you can act quickly when an opportunity arises. Keep a combination of fiat and
BTC on multiple exchanges. This way you can promptly seize any opportunity that
occurs between those exchanges without having to wait for a transfer bank
account and the exchanges.
2. Identifying Arbitrage
Opportunities
You can
identify arbitrage opportunities with the following:
Pricing: Different exchanges may list the
same asset at different prices. The difference in profit is where your
opportunity lies. However, to exploit
the opportunities via this method you must consider trading fees for a coin;
costs incurred on withdrawing/depositing a coin; blockchain network fees; and
in addition to that the time factor. This method is highly dependent on a
window of opportunity and hence the speed of transactions directly impacts the
risks and profits.
Geography: The prices of cryptocurrencies may
vary from country to country due to the factors associated with supply and demand.
Therefore, geographical arbitrage presents a unique platform to take advantage.
However, it's critical to factor in the regulatory differences and laws unique
to every country's financial governance. If you can manage to comply with the
laws and regulations, then geographical arbitrage is a great opportunity.
Listing
Arbitrage: At the time when a crypto asset is listed on a new exchange, it
offers tiny a window of opportunity for profitable price arbitrage.
Once you
effectively figure out where to look for the best arbitrage opportunities for
you, you can quickly strategize and start making profits.
Final Words
While Bitcoin arbitrage might seem easy, but
once you factor in the fees and time it takes to capitalize on arbitrage
opportunities, it becomes a lot harder to make profits. However, once you
understand the costs, Bitcoin arbitrage can be a really useful tool for a
trader.BITTREX BOTS
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