Crytpo Arbitrage Trading: Beginner’s Guide
What is Crypto Arbitrage Trading
First of all, it’s good to know the definition of “arbitrage” before we get deeper into crypto arbitrage.
According to investopedia.com
Arbitrage is the purchase and sale of an asset in order to profit from a difference in the asset’s price between markets. It is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets or in different forms.
a difference in the asset’s price between markets
That’s it!
So if you have been in trading or investing crypto assets for quite some time, you might be wondering there are price differences between different crypto markets and exchanges.
Even the most biggest market capitalization digital asset — Bitcoin is traded at varying prices on separate markets. So that means, there is an arbitrage opportunity that we can explore.
Sounds easy? Yes. However, it does deserve a lot more study and work than just a spark of idea.
Let’s take a look at what is crypto arbitrage and how it actually works.
How Does It Work
This style of trade capitalizes on price imbalances between markets.
Simply put, this happens when an object happens concurrently purchased and sold in two markets — often because it is traded at slightly different prices.
For example, shares in a technology business may be on sale for $35 on the New York Stock Exchange, but may be available for $35.10 in London. Yeah, the gap is small — but easily bulk buying shares at a cheaper price and selling them at a higher price will result in a tidy profit for an eagle-eyed trader. This definition captures the basic essence of arbitration and is relatively low risk compared to other techniques.
Now, you might be wondering: how do those inefficiencies occur? Yeah, there’s a lot of explanations. Currency volatility can mean that foreign exchange stock is undervalued. Markets are often incomplete, and synchronicity between exchanges can be difficult to obtain. Asymmetrical details between buyers and sellers is also a breeding ground for arbitration. Unfortunately, with such slim profit margins, trade costs will inevitably mean that certain arbitration options have no financial meaning to follow.
Arbitration will operate through a variety of financial instruments beyond stocks — bringing us up to our next issue very well.
