What is Arbitrage Trading?
5 mins read
2 mths ago
Whether we’re in the bull and the bear market, crypto arbitrage trading has remained one of the best ways both newbie and experienced crypto traders make money. It does not require many complex theories or methods; with your device and an internet connection, you can easily carry out crypto arbitrage trading.
Being simple doesn't mean that you won't have to learn about how it works and the types of crypto arbitrage trading. Also, you need to learn strategies that will help you profit massively from the process. Below is everything you need to learn about arbitrage trading, the different types, and how to go about each one of them.
What is Arbitrage Trading?: All you need to know
In order to profit from an asset's price differences in different markets or locations, an investor uses the investment method called arbitrage trading. The profits can be significant when repeated by a high volume, despite the fact that pricing variations are often tiny and transient.
A profitable arbitrage strategy happens in buying low from one exchange and selling higher at another. Due to the fact that arbitrage trading is based on price or value differences, this trading principle can be used in crypto trading, commerce, stock trading and various financial instruments.
How Does Arbitrage Trading Work?
Here is a crypto arbitrage trading illustration to help you better understand what is meant by monitoring and taking advantage of price differences between two or more exchanges. Assuming there are two exchanges called A and B, the first thing in a profitable crypto arbitrage trading is to monitor the price of the crypto that will be involved in the arbitrage trade. Let's say you are going to trade bitcoin between the two exchanges, you will have to monitor the price of bitcoin between the two exchanges closely.
If the price of bitcoin in exchange A is $20,000 and the price in exchange B is $20,500, that means you will have to trade the bitcoin you have in exchange A at Exchange B. So how do you do it, and how much profit are you going to make?
Selling the total bitcoin, you have to exchange B means you will sell it to them at a higher price different from what it is sold for in exchange A. Let’s say you have bitcoin worth $20,000 in exchange, and you sell it to exchange B at their rate of $20,500, you will make a profit of $500.
This is just an illustration to demonstrate what arbitrage trading is; the price of bitcoin might be higher or lower at the time of writing.
Types of Crypto Arbitrage Trading
There are different ways you can engage in crypto arbitrage trading and still make a profit, below are the major types of arbitrage trading.
Pure Spot Arbitrage Trading
This is one of the most common types of arbitrage trading used by amateurs because of how simple it can be. The majority of what is involved is just to find a crypto exchange with a lower cryptocurrency exchange rate, buy from them, and then sell it to another crypto exchange.
Positional arbitrage Trading
Among other types of arbitrage trading, positional arbitrage trading is similar to pure spot arbitrage trading, although there are differences. The major difference is that you realise a profit with this arbitrage trading by opening positions on different exchanges and then closing them once it has converged enough for you to make a profit.
Interest Rate Arbitrage Trading
A crypto enthusiast should know that they are crypto exchanges that facilitate the lending and borrowing of cryptocurrencies to users. Therefore, crypto traders can use the opportunities involved with this process to make a profit with arbitrage trading. Another thing to know about this type of arbitrage trading is that it does not involve many risks. All you will have to do is go to an exchange that borrows funds from users at a lower rate and then lends those funds to an exchange whose rate is higher.
What Influences Arbitrage Opportunities?
Arbitrage trading opportunities don't just come out of the blues, certain things influence when those opportunities present themselves and how they present themselves. With arbitrage trading, a trader continues to make money even in a bear market.
Transfer and transaction costs
Transfer and transaction costs are a major determinant of how a trader should go about crypto arbitrage trading and the strategies they will employ. You will have to note that the majority of the opportunities that come with these transaction costs are meant for those who are whales in the market.
In a crypto exchange, investors producing high trade volumes have lower transfer and transaction costs, unlike those with minimal trade volumes. Therefore, they can capitalise on that to carry out different types of crypto arbitrage trades on the exchange.
Local Restrictions on Fiat
Local restrictions are another factor that determines the definition of what is arbitrage trading and how you should go about it. Some countries in the world are known for blocking the outflow of fiat currency out of the country, leading to reshuffled demand and supply in exchanges. One of the major countries known for this is South Korea; many people usually capitalise on this to make money.
So traders can make money with this situation by buying cryptocurrencies such as bitcoin from an exchange outside of South Korea and then selling them to exchanges that reside in South Korea. The reason behind this is that exchanges in other parts of the world have lower prices for cryptocurrencies than exchanges that are located in South Korea.
Crypto arbitrage or any form of arbitrage trading is one of the effective trading strategies to leverage. Crypto arbitrage trading is the act of capitalising on the price differences that are found in different exchanges and then using them to make money. As a crypto trader, knowing what arbitrage trading is, its types, and how to make money using the methods mentioned above is very important.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.