Arbitrage is nothing but buying something at a low price and selling it at a comparatively higher price.
You may have seen it happen in real life; people bring goods from cities where they are widely available (more supply) and sell them in cities with high demand. They buy goods at a competitive price from where it has abundant supply and sell it where there is high demand at a higher price to profit from the price difference.
It’s the same concept put to use in the financial markets. People buy assets at a relatively low price and sell them at a high price.
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What is Crypto Arbitrage?
Cryptocurrency arbitrage trading involves an instant purchase and sale of a cryptocurrency to realise profits.
In the cryptocurrency market, there is no uniformity in the prices of assets between exchanges. The same cryptocurrency is priced differently on different exchanges. This difference opens up the opportunity for traders to perform arbitrage trading.
How to Make Money with Crypto Arbitrage?
Every exchange is an individual market, and there is a slim price variation between these markets. So you can buy crypto from an exchange where its value is lower and sell it on the exchange where its value is higher.
It is one of the most renowned trading strategies in the cryptocurrency market. This strategy involves minimum risk while giving you a fair idea of the potential profit. Traders compare the prices of cryptocurrencies across platforms and identify spreads, though the challenge is to capture the trade before any other trader.
Let’s assume that on CoinSwitch Kuber, a cryptocurrency’s buy price is lower than the X exchange. Being an arbitrage trader, you should be quick enough to bag the deal before other traders. If you fail to do so, someone else will capitalise on it, and the opportunity will be no more.
Once the trade is made, the prices will refresh on both exchanges.
Now, there are different ways to do crypto arbitrage:
Types of Crypto Arbitrage Trading
1.Trade Between Exchanges
Trading between exchanges and profiting from the price difference between them is one way you can leverage arbitrage.
However, the challenge here is to be on your toes to find the opportunity and seize it. There are thousands of exchanges, and there is a good chance that somebody will beat you with a faster trade because these spreads last for a short time and may disappear by the time you transfer your cryptocurrencies from one exchange to another.
Another challenge here is that you need the spread to be wider to profit even after paying for network fees and exchange costs.
Though you may find many opportunities when you arbitrage between an exchange, the test here is to grab it and make a profit.
2. DeFi Arbitrage
Decentralised Finance is a financial infrastructure built on a network, say Ethereum, that supports various financial protocols on the blockchain.
Here you can leverage the interest rate differences between various lending, staking and other DeFi protocols to benefit from it.
If you have staked your cryptocurrencies in a pool with a specif return/yield and another pool gives a better return, you can move your cryptocurrencies and profit. You can implement the same strategy in lending protocols as well.
Treaders also use the triangular arbitrage strategy within the DeFi ecosystem to trade between DeFi tokens and profit.
3. Triangular arbitrage
Triangular arbitrage is where you trade between three cryptocurrencies; you start a trade with one cryptocurrency and end up with that cryptocurrency but of a higher value.
Traders find the cryptocurrency that is undervalued on the exchange and take advantage of it to profit. Let’s say you have some Bitcoins, you sell them for some Litecoins and then use the Litecoins you buy some Bitcoin Cash, and when you eventually sell BCH for BTC, you should ideally have more Bitcoin than before.
Traders must identify undervalued assets and buy them at the right time to exchange them when they are priced accurately.
Is Crypto Arbitrage Legal?
Yes, Crypto arbitrage is 100% legal; it is just another trading strategy that utilises the existing price difference between exchanges. There are various ways one can do it, some of which we discussed above.
Though the profits involved may be slim, arbitrage is a widely used technique in the cryptocurrency market and other financial markets.
KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.