If you’ve been following the world of cryptocurrency for a while, you can notice the price differences between various crypto markets and exchanges. Due to fluctuating liquidity, there is a constant difference between the assets owned and the exchange value. Even the most liquid asset traded by Bitcoin can have varying prices on different crypto exchanges. In such cases, traders can use cryptocurrency arbitrage trading to seize opportunities like this and generate profit. Here, we will explain what is crypto arbitrage trading so that you can multiply your digital assets as well.
What Is Cryptocurrency Arbitrage Trading?
Arbitrage is the process of buying, comparing, and selling an asset from different markets in order to make maximum profit. Cryptocurrency arbitrage works in the same way. In order to maximize your profit, you need to search for a specific coin that is cheaper enough to buy from one crypto exchange and sell on another.
Arbitrage trading is not new to stock markets, foreign exchange markets, or bonds. However, with developing quantitative systems in order to search for price differences and executing trade across different markets has made arbitrage trading out of reach for many retail traders.
Currently, the arbitrage opportunities in the world of cryptocurrency can be significantly more lucrative than other financing options. It has a quick surge in trade volume, especially because of the inefficiencies between crypto exchanges causing high price differences. Larger crypto exchanges with high liquidity drive the prices of the market overall. The smaller crypto exchanges follow the prices set by the larger counterparts. Thus, the opportunity for arbitrage in cryptocurrency arises because small exchanges don’t immediately follow prices set on larger exchanges.
How Does Crypto Arbitrage Trading Work?
Crypto arbitrage trading is possible by differentiating trading volumes between different markets. A market that has high trading volume and reasonable liquidity of a certain cryptocurrency, the prices are usually cheaper there. On the contrary, when a market has a limited supply of a certain coin, the chances of costs are higher. Thus, by purchasing from the former and selling on the latter can give a crypto trader a clear profit.
Arbitrage opportunities are possible in the opposite direction as well – you can buy on a small crypto exchange and sell on a large one. In case of a surge in global cryptocurrency deals, there can be an increase in trade volumes. A possibility of low trade volume on certain exchanges might mean that the cost listed doesn’t adjust to the exchange average instantly. Such a possibility of price difference can lead to a loss instead of generating targeted profit.
Crypto Arbitrage Trading Methods
There are three methods of crypto arbitrage trading
1. Spatial Arbitrage
In this form of trade, you take advantage of different prices for a certain cryptocurrency. Hypothetical example: Exchange X offers BTC for $9,000 and Exchange Y sets the prices at $9,300. You can take advantage of $300 by purchasing from Exchange X and selling at Exchange Y. Your move will effectively shift funds from one platform to another. Due to a high level of decentralization in the crypto market, such discrepancies can happen quite often with many coins.
2. Cross-Border Arbitrage
Cross-border crypto arbitrage is when you follow spatial arbitrage trading with different countries. Note that this form of crypto arbitrage trading is difficult to pull off. Such arbitrage opportunities might exist when crypto traders, in jurisdictions with relatively high prices for coins, cannot access the market rate for themselves.
3. Statistical Arbitrage
Statistical arbitrage is a technical way of calculating and analyzing the correct form of a crypto trade. It can be riskier compared to other methods of trading as you may need to measure trading algorithms and capitalize on pricing discrepancies. Statistical crypto arbitrage needs to be done within a very short span of time as that can influence the final result.
What Torex.One Crypto Trading Platform Can Be Used For?
In order to potentially maximize profits and minimize risks, crypto traders need the necessary tools that can make the process easier and reliable. Torex.One helps traders benefit from multiple exchanges by using cryptocurrency arbitrage. You can trade multiple currencies by using the wide range of crypto trading tools developed by Torex.
Torex.One offers API-trading with implemented ‘Stop Loss, Take Profit, and Trailing Stop algorithms. It has also developed a price checker tool and a Telegram-based price notification tool for monitoring the cryptocurrency prices actively. The cryptocurrency arbitrage tool can help to analyze the Level 1 and Level 2 market data. Not all arbitrage tools available online provide their customers with Level 2 data. Torex Arbitrage Tool analyzes the liquidity of order books on preselected crypto exchanges. This allows you to take a position after taking the liquidity conditions under due consideration.
Torex.One is compatible with seven exchanges for API-trading as of now. These include Bittrex, Huobi, Binance, Bitfinex, Poloniex, Coinsbit, and KuCoin crypto exchanges. In due course of time more crypto exchanges can be added. Besides the web version of the Torex crypto trading platform, crypto traders can download the .apk file of the Torex mobile cryptocurrency app, which is going to be added to AppStore and Google Play digital distribution networks. This will further enhance the accessibility of Torex on the go.
Torex Arbitrage Tool Features
Here are the parameters you can set with Torex.One Arbitrage Tool:
- Choose among 9 crypto exchanges to search for open arbitrage windows (Binance, Bittrex, BKEX, Crex24, Huobi, Poloniex, Bitfinex, Coinsbit and KuCoin);
- Filter orders on minimum daily volume in BTC equivalent – it allows eliminating crypto exchanges with low daily volumes;
- Crypto arbitrage volume – the amount you want to spend to buy or sell. The Arbitrage Tool will analyze the necessary depth of the order books;
- Minimum expected arbitrage profit in percentage points.
Torex.One can give you updated quotes and inform you of the discovered crypto arbitrage windows. A crypto trader needs to analyze the market condition before making any decision on any order, taking into account that making a crypto arbitrage can be associated with risks and requires relevant expertise.
Legality Of Crypto Arbitrage
Traders new to cryptocurrency arbitrage might be uncertain about its legal status. The legality of cryptocurrencies varies significantly from country to country and its status is still undefined in some jurisdictions. While many countries have explicitly allowed the use and trade of crypto, some others implemented regulations that forbid or restrict it. Before jumping into crypto arbitrage, do check your local laws once.
Is Risk Aversion Possible In Crypto Arbitrage?
Crypto trading is associated with many risks and a crypto trader needs to have the necessary knowledge and experience before entering the market. The wise man said, “An ounce of practice is worth more than tons of preaching.” You can try the Torex Arbitrage Tool and define whether it meets your trading needs.
A simple law can be applicable to trading, the greater the risk the greater may be the reward. The risk involved in crypto trading can be negated or minimized. This can be done by ensuring the money a crypto trader is using is not needed in the short-term. It should be money a crypto trader can do without right now. Another thing you can do is to take calculated risks and hone your skills before making big moves.
Crypto arbitrage can sometimes offer relatively high returns in a short time period to those willing to take the plunge.
Good crypto traders can become Market Makers. These market makers can be risk-takers who by increasing the transaction volume, provide liquidity in the free markets. Such an increase may lead to smaller price fluctuations of assets and make long-term investors purchase assets without affecting the price significantly. The process can make the market predictable or can stimulate slower price movements in the long run. Low liquidity is one of major concerns in the cryptocurrency market. As a result, the opportunity for arbitrage is potentially huge and traders can make money by making crypto arbitrage transactions.