Cryptocurrency with its tenets of decentralization and advanced accountability is gaining momentum with every passing day. In this light, it demands a nuanced understanding from its pursuers and enthusiasts regarding its many idiosyncrasies. Given the novelty of this particular domain, the opportunities for exploration are quite abundant here. On the flipside however, the chances of a slip-up may be comparatively higher as well. This could be on account of the absence of a traditional and foolproof cryptocurrency rule book or guide. Like any other finance and trading technique, the eventual aim of cryptocurrency exchange is pretty well defined as well. This is to potentially maximize profits and minimize losses. Bitcoin arbitrage is among the few strategies on the trading front that helps facilitate this very possibility.
Having thorough knowledge of crypto exchange platforms and market volatility aren’t sufficient starting parameters. These amount to nothing if a trader doesn’t happen to possess a few trading techniques under their belt. Especially in a domain like cryptocurrency where stability is utterly ambiguous, a trading acumen is your only saving grace.
For beginners to the field, Bitcoin arbitrage serves as a decent entry point for them to learn the process. For some experienced crypto traders, it is a reliable way to further consolidate on their stronghold in the market space. Before getting started with Bitcoin arbitrage and crypto arbitrage in general, let’s develop a basic understanding of arbitrage first. The objective of this particular article is to expand upon arbitrage as a higher-level concept to begin with. Further it strives to tie in the basic tenets to the world of cryptocurrency trading for greater clarity of enthusiasts.
What is Bitcoin Arbitrage?
Before delving deep into Bitcoin arbitrage, we can shape basic facts about arbitrage as a notion. Simply put, arbitrage is a trading strategy that relies on price imbalances in the market space. It generally involves exploiting the price differences for the same asset or commodity across different markets. These price discrepancies hoist themselves into existence upon multiple grounds. In large they owe their provenance to the market inefficiencies of a young and yet insufficiently regulated crypto world. Fluctuations in currencies, as prevalent as it is in the trading field, finds even greater relevance in the сryptocurrency sphere. This may lead to the same stock being undervalued in some markets and getting overvalued elsewhere. Exploring this particular asynchronicity and using it your advantage while trading is what arbitrage is all about.
Given how nascent and volatile the crypto scene is, Bitcoin arbitrage is a highly exercised option across crypto exchange platforms. A sensible understanding of the BTC arbitrage table helps guide these decisions accordingly. One generally needs to take into account the exchange fees and the market depth fees to facilitate the arbitrage table. Asymmetrical communication between buyers and sellers further fuels the cause of arbitrage in crypto trading. The phenomenon of “Kimchi premium” finds its usage as a learning tool to drive home the implementation of Bitcoin arbitrage. In this particular model, traders in South Korea end up paying a premium price for Bitcoins in terms of USD due to the fact that the amount of money South Korean traders may move out of the country each year is capped and transfers must be approved by regulators. There were cases when prices for Bitcoin and other cryptocurrencies were substantially higher in South Korea in comparison with US, Europe, and other countries.
Bitcoin Arbitrage vs. Day Trading and Swing Trading – a Contrast
In order to learn additional aspects of Bitcoin arbitrage, one can gain a deeper insight into its contemporaries. You can choose to develop a deeper understanding which may allow you to make better informed decisions. A study of the contrast between these styles may help the end-user gain additional practice in their trading activities. Apart from arbitrage, two other trading techniques that find wide-spread usage are day trading and swing trading.
Day trading involves executing investment and selling strategies within the span of a single day in the market. Day traders usually find themselves capitalizing on minimal price displacements in highly liquid stocks or cryptocurrencies. While both day trading and arbitrage exploit market efficiencies, the fundamental difference lies in the time span that they exercise. Unlike day trading, arbitrage exchange may not happen in the span of a single day. Traders generally let the market discrepancies reach a particular peak before exercising discretion on the undervalued or overvalued Cryptocurrency involved.
Swing trading, on the other hand, encourages a vastly speculative style to trading in the first place. Swing traders tend to pocket gains from a crypto exchange who’s monitoring usually ranges from a few days to weeks. Contrary to the arbitrary strategy, swing trading entails holding a position either short or long across multiple trading sessions. The reason for doing this is because the primary objective of swing trading lies in capturing chunks in potential dealings. The risk to reward ratio can be one of the major distinguishing parameters between these two trading styles. While swing traders continuously deal with unstable risk to reward ratios, crypto arbitrageurs often operate within potentially low risk environments. Subsequently, it can be more difficult to score a profit in arbitrage when compared to scoring one in swing or day trading.
Types of Bitcoin Arbitrage
There are various kinds of Bitcoin arbitrage measures in place that both new and seasoned arbitrageurs can make use of. Each variety maps to a different trading psychology and may work towards maximizing the benefit of that particular trader. The following section sheds light on the various Bitcoin arbitrage strategies for the reader’s reference:
Simple Crypto Arbitrage
In Bitcoin arbitrage terms, it is the most primitive form of Bitcoin exchange that an arbitrageur can indulge in. It includes the simple act of purchasing a currency from an undervalued market and selling it at an overvalued one. A simple example involves buying сryptocurrency from Coinsbit and selling it on popular crypto exchange platforms like Binance or Bittrex.
Simple arbitrage allows you to earn the price difference over the same currency rather instantly. In market terms, this particular price difference that hinges around one entity is known as the spread. Thus, simple arbitrage is among one of the foremost Bitcoin arbitrage techniques to pocket this spread. Further, this technique also allows you to facilitate transfers between various cryptocurrency exchange platforms.
Crypto Triangular Arbitrage
Triangular arbitrage is among the most widely explored options in the Bitcoin arbitrage catalogue. As a trading technique, it can be implemented across multiple exchanges as well as just a single exchange as well. Triangular arbitrage generally springs into action when there’s noticeable mispricing between three pairs of cryptocurrencies. Since the fluctuation among ETH, LTC and BTC is rather dynamic, crypto triangular arbitrage becomes the preferred tool for crypto arbitrageurs.
When the ratios between the different coins, gives you different USD prices, an arbitrage opening announces itself. While adopting triangular arbitrage, you generally sign yourself up for a looping activity. You begin with one asset and transition to an intermediate and tertiary currency to advance the arbitrage loop. This is done to potentially obtain zero-risk profit. At the end of the loop you traverse back to the asset where you started from in the first place.
Convergence arbitrage is a Bitcoin arbitrage technique that is generally prevalent among the more seasoned campaigners. This technique hinges around the basic premise that prices across different cryptocurrencies and markets will eventually converge. A simple pipeline is to be followed in order to facilitate this procedure. For instance, you can buy from an exchange platform where the merit of the cryptocurrency is particularly undervalued. Subsequently, you can short-sell it on an exchange where it is overvalued. This way, you end up bagging the profit when the prices eventually happen to converge. However, there’s one basic criterion in order to go ahead with this technique. Convergence arbitrage needs the exchanges to also allow for sorting of the spread pertaining to each of the cryptocurrency.
Cash and Carry Arbitrage
The cash and carry arbitrage technique is a Bitcoin arbitrage measure that is more suited towards the futures market. In essence, cash and carry arbitrage is predominantly a market neutral strategy that makes use of two particular combinations. It entails the purchase of a long position in an asset that is more prevalent in the spot market. Subsequently, it also fosters the short-selling of a position in the futures market on the exact underlying asset. So basically, what it does is it carries the asset until the futures contract expires. Then upon that particular occurrence, it allows for the requisite settling with the long position. The cash and carry arbitrage technique allows the trader to secure the difference right when they deliver. This technique aims to exploit the price discrepancies between the spot and the future markets.
The primary ingredient towards achieving success in the Bitcoin arbitrage domain is to rely on transfers with faster coins. This in turn is dictated by network congestion and cryptocurrency wallet maintenance. Traders who have ample experience in the cryptocurrency exchange platform fronts arguably vouch for arbitrage as a reasonably reliable trading maneuver. The jury is still out on the long-term sustainability of this particular technique. However, for all reason and purposes Bitcoin arbitrage is a considerably risk-free measure for the potential minting some credible profit.