How to Make Low-Risk Gains with Crypto Arbitrage Trading
Crypto arbitrage trading refers to traders purchasing cryptocurrencies and then selling them simultaneously on another exchange market with a different price. As such, crypto investors trade digital assets with little or no risk, making significant gains in the long run. The strategy doesn't require one to have advanced knowledge in crypto or have an expensive setup. Investors can make low-risk gains using arbitrage trading.
Arbitrage Trading
Investors, both novice and professionals, have engaged in Arbitrage for a long time before the traditional financial market's crypto market. Investors using arbitrage trading strategies seek to gain profits from the slightest price differences in the crypto market. The trading strategy involves traders buying and selling digital assets simultaneously across different exchanges.
It's all about leveraging asset prices to the investor's advantage. For example, 1 BTC might be valued at $28,000 on the Binance exchange and priced at $28,120 on Kraken. Based on the price discrepancy between the two exchanges, there is a $120 opportunity for arbitrage.
However, arbitrage trading isn't as easy as it sounds due to the market's volatility. Trades have to be made instantaneously to earn a profit or face a market fluctuation that might lead to huge losses.
Regardless, most cryptocurrency traders make profits from market inefficiency. Merchants may find opportunities during a surge in trading volumes, and the small exchanges normally follow prices set by giant exchanges. It leaves a window trades can take advantage of when trading between large and small exchanges, leveraging the prices to make a profit.
Low-Risk Arbitrage Trading
Following the high volatility witnessed in the crypto market, arbitrage trading has high risks involved. In contrast, it might sound easy to purchase and sell an asset across different exchanges, unforeseen events, costs, surges, or even unexpected market trends. As such, it's key to apply accurate, low-risk arbitrage trading strategies. Most cryptocurrencies, especially major assets like Bitcoin and Ethereum, take 10-20 minutes to confirm transactions. When the market prices drop during the time frame, there is a risk of yielding less arbitrage or even huge losses.
Various factors like different news cycles, wallet security, time, and geographical location affect the strategy results and need to be considered when trading digital assets. Arbitrage trading is a generally profitable trading strategy where investors earn 0.2% to 2.5% or $10 to $100 daily. There are several ways arbitrageurs can profit using this strategy:
Cross-exchange Arbitrage Trading
It's the basic form of arbitrage trading. Here, traders seek to generate profits by purchasing crypto on one exchange that has low prices, then selling it to another exchange with higher prices. As such, yielding profits is direct and low-risk. It's the easiest form of arbitrage trading available.
Spatial Arbitrage
Spatial arbitrage is a form of cross-exchange trading, the difference being that exchanges are located in different places. Here, arbitrage trading it's not focused on crypto prices on the exchange markets but across various regions.
An example of such is capitalizing on the demand and supply differences of Bitcoin in Europe and America through spatial arbitrage. If a spatial arbitrage strategy is applied, leveraging the crypto prices across these regions can yield profits.
Triangular Arbitrage
Unlike cross-exchange arbitrage, triangular arbitrage trading involves moving different digital assets across one exchange. It aims to capitalize on price discrepancies of one or two digital assets. An example is buying BTC, then exchanging it for Ether, trading Ether for ADA tokens, and changing the ADA coins back to BTC.
In case of any discrepancies in any of the token prices, arbitrageurs will end up with more BTC than the initial amount. All transactions are carried out in one exchange, excluding the risks of the high withdrawal fees across various exchanges.
Decentralized Arbitrage
Decentralized arbitrage trading is common on automated market makers (AMMs) and decentralized exchanges (DEXs) like Uniswap. The crypto trading prices are discovered with the help of smart contracts. If the crypto trading pairs are different from their spot prices listed on centralized exchanges, arbitrageurs can take advantage. They can execute cross-exchange trades that involve centralized exchanges and decentralized exchanges.
Statistical Arbitrage
Statistical arbitrage involves computational, statistical, and economic techniques to execute scaleable arbitrage trades. Here, arbitrageurs rely on mathematical models and formulas and trading bots to carry out high-frequency arbitrage trades. High gains are made using this arbitrage trading since the bots make it possible to execute lots of trades in a short time frame. It is an excellent low-risk strategy.
Author’s Take
Arbitrage trading is a strategy that has been in play for a long time and still proves to be profitable to crypto traders. The various kinds of arbitrage trading strategies allow traders to make low-risk gains across the crypto market. Taking advantage of the price differences of assets across exchanges or different regions is a trend being adopted by investors. However, there are things to consider when using arbitrage trading strategies.