If you have been in the crypto market for some time, then you definitely have seen the difference that exists between different exchanges and crypto markets. This is mainly because of the volatile nature of most digital currencies. It is not a bad thing since it offers great arbitrage opportunities to investors.
What is Cryptocurrency Arbitrage?
Cryptocurrency arbitrage is all about taking advantage of price fluctuations. Although cryptocurrency trading has been in existence for some time now, the prices of each crypto are different from one exchange to another.
Every crypto exchange values cryptocurrencies differently and this may be as a result of various factors. Cryptocurrency arbitrage gives traders an opportunity to leverage on the price difference. They are able to purchase cryptocurrencies from one exchange and quickly sell it on another.
Arbitrage is not a very new concept. It is common in the stock market, bonds as well as foreign markets. It is a scenario where investors purchase the same type of assets and sell them in different markets to earn profits.
Opportunities often arise due to the price differences caused by a rapid increase in trade volumes or market inefficiencies within different exchanges. According to experts at SoFi, leveraging is always possible provided the fact that markets are not perfect.
How Does Cryptocurrency Arbitrage Work?
As mentioned earlier, arbitrage can happen due to a number of factors. But the main factor is the existing price difference in trading volumes between one exchange to another.
In bigger exchanges, the trading volumes can be really high, something that results in lower prices. But if the trading volumes in another exchange are minimal, then it means the price of cryptocurrencies will be higher.
Additionally, cryptocurrency arbitrage may also happen in case crypto is listed on one of the popular exchanges.
Types of cryptocurrency arbitrage
There are basically two types of cryptocurrency arbitrage. The first one is called triangular arbitrage or arbitrage between different exchanges. The second is arbitrage that happens within an exchange.
Why crypto arbitrage can be lucrative
There are many reasons why many people find crypto arbitrage as lucrative including:
• Quick profits: If all goes as planned, crypto arbitrage can be a great way of earning a lot of profits within a short time
• Crypto markets are new and highly volatile: There are close to 200 exchanges where investors can buy and sell cryptocurrencies.
• No stiff competition compared to traditional markets
How do you determine profits & costs of crypto arbitrage?
Although every situation is different, there are certain factors that you must always consider. These include taker fees, transaction commissions, deposit fees, and final withdrawal fees.
Step-By-Step Crypto Arbitrage Process
1. Discover existing opportunities
There are many tools you can use to discover crypto arbitrage opportunities.
2. Determine if the opportunity is worth it
This is where you decide whether the opportunity you identified is worth the risk or not before jumping in. Try doing research on the risk and determining how much profit you can make.
In general, cryptocurrency arbitrage offers a great opportunity to investors. Using arbitrage crypto by SoFi is one of the safest ways to trade.