Within the world markets, cryptocurrencies are considered the future of the economy. And as a result there are countless strategic techniques used by investment funds, professional traders, banks and institutions to benefit significantly from operations in digital currencies. Among these practices, the most common and most used, but not without risk is arbitrage in cryptocurrencies.

Crypto Arbitrage Example

First, imagine that a trader has bought 0.1 BTC on exchange A, at a price of $9000 per BTC. In total, the trader’s purchase investment is $900. But once the trader has these 0.1 BTC, he offers them for sale on exchange B. Only, in this case, exchange B has a price of $10,000 per BTC. This means that the 0.1 BTC would have a value of $1,000. And after selling the same, the trader will have a net profit of approximately $100.

Definition of Arbitrage

Arbitrage can be defined as the process of buying cryptocurrencies on an exchange platform at a low price and selling them on another market with a higher price. In other words, a digital asset is bought where it is cheaper and sold on exchanges where the price is high.

Why rates are different?

This is possible because different exchanges generally have different prices for the same cryptocurrency. Let’s remember that the price of the same is established by the pressure between the demand and supply of those who sell coins and those who wish to buy them. A dynamic bidding that gradually pushes the price down or up as the case may be. Therefore, this price differential situation is used by traders to profit from their investments through arbitrage.

Now, although this may sound simple, in practice it is a bit more complex. This is because as markets grow, regulate and evolve, the spreads between one asset and another are reduced until they become insignificant. Although it is still possible to be profitable with this strategy, its execution is generally limited to algorithms and mathematical calculations performed by systems belonging to large institutions. Since the beginning of Bitcoin and the rest of the exchange market, these companies have strived to keep spreads quite low.

How to Win Big through Arbitrage

Use Automated Tools: Currently, due to the complexity in the interaction of traders with exchanges to look for opportunities, many in the crypto community have designed systems and tools that facilitate this task. Therefore, there are websites that allow you to visualize arbitrage opportunities in different cryptocurrency markets such as Black Bird and Hummingbot, as well as tools that will allow you to perform arbitrage operations in a simpler way such as Executium.

Stay Attentive to Market Signals: However, even when using these tools, the transaction times between exchanges make arbitrage a lottery due to the volatility of the market. It is for this reason that, most likely, the most important thing to keep in mind when trying to implement arbitrage is to be prepared for anything. The world of trading is extremely dynamic, and cryptocurrency trading even more so. From one moment to the next cryptocurrency prices can fluctuate in incredible ways. This is why being attentive to market signals is essential in order to carry out a good arbitrage strategy.

Stay alert: One should seek to minimize the impact of waits on trading when doing arbitrage. It is essential to act quickly in order to take advantage of any opportunity that appears, as this is the basis for arbitrage operations to generate profits. In case of untimely buying or selling operations, the result could be a considerable and irreversible loss of money.

Look for good opportunities: In this sense, knowing how to look for good arbitrage opportunities is also important for any trader. These will not magically appear before your eyes. On the contrary, you must be very attentive to the order books of the exchanges in order to look for arbitrage opportunities in them. This is a complex task and requires time and practice; once you learn to control it, taking advantage of arbitrage opportunities will be easy.

Frauds in Arbitrage

Avoid Frauds: Now, all of this brings us to a point that should not be overlooked and that is that, although arbitration sounds like a wonderful practice, the harsh reality is that it has become one of the most common fronts for fraudsters. In most cases, widely proven Ponzi schemes are used, where the proceeds from new participants are used to pay off older investors.

Other scammers use highly automated and sophisticated processes. For example, software that interacts with Telegram, a web-based instant messaging system popular among those interested in cryptocurrencies. Even in cases where the cryptocurrency scheme is legitimate, fraudsters can manipulate its price in the market.

For all these reasons, in an environment such as the current cryptocurrency market, those interested should take the precaution of investigating where they are investing their money, who are the people involved and what is really the business strategy to generate profits (without defrauding other people).

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at nikeshmehta@allonmoney.com.