Pitfalls of Crypto Arbitrage Trading
We have already addressed the topic of arbitrage in the earlier article (read it here). We remind you that this is another way to earn money from the virtual market. The main idea may be summarized as follows: buy low, sell high using different exchanges. If you managed to buy crypto at a low price on one platform, quickly transfer it to another, and sell it at a higher price to cover the commission and earn money, this is it - cross-exchange arbitrage. In theory, everything is simple, however, this strategy has some serious risks that everyone should be aware of. Today we will talk about them.
Where Does the Difference in Price Come from?
The market sentiment "manipulates" the price of an asset. The more people want to buy a particular coin, the higher its value. Supply and demand depend on a number of factors that determine the overall attitude of investors and global trends. Since everything is ultimately based on human needs and emotions, the price fluctuates every minute.
The geographical location also plays a role. Supply and demand vary from region to region. Therefore, as a rule, prices on different websites change.
In addition, the price of an asset is determined by the last transaction made on the exchange, i.e. it may be substantially higher or lower, depending on the platform. As you may have guessed, traders turn this different price range to their advantage.
Depending on the time and place where transactions are conducted, arbitrage can be divided into:
Inter-exchange arbitrage. Arbitrage between exchanges.
Intra-exchange arbitrage. All transactions are carried out on a single platform.
Advantages of the Trading Technique:
- a great way to increase your crypto savings. In the normal course of events, you can quickly get a profit;
- you don't need a fundamental knowledge of the functioning of markets;
- less risk than holding the asset in the long term.
Those Same Pitfalls
In addition to the commission costs, you should consider:
- Spread. It tends to increase during periods of high volatility, giving more opportunities to earn money on arbitrage. Nevertheless, the risks for the user also increase, because the spread can decrease at any second.
- Depth of market (the number of orders). The higher the liquidity, the greater the number of orders. A sharp change in the exchange rate will require the sale of a large sum, and, therefore, there will be more time for maneuvers.
- The speed of deposit/withdrawal of funds. The withdrawal process usually takes no more than 15 minutes. But don't forget that other users are also involved in arbitrage. During periods of high volatility, crypto fans are more active in depositing/withdrawing funds on exchanges. This can not but affect the speed of execution of orders.
- Availability of deposits/withdrawals. When the exchange rate differs significantly from the price on other platforms, web wallets can be closed.
- The problem of names. Sometimes different coins/tokens on different exchanges have the same name. Always check the asset and analyze how much you can earn on it. To protect yourself from fake coins, it is better to trade on trusted exchanges.
P.s. learn other ways to earn money from the crypto market in our blog.