Arbitrage Strategies

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Arbitrage Strategies
28/02/2019
Arbitrage cryptocurrency trading is becoming a popular strategy, today. The presence of a large number of exchanges allows us to come up with various schemes of speculation and quick earnings. Let’s see some examples of cryptocurrency arbitrage.

For many traders, arbitrage trading in the Forex market is a source of stable profits. Meanwhile, this strategy can be successfully applied in the cryptocurrency market.

Today, we will discuss 3 most common arbitration schemes with Bitcoin and other Altcoins and consider their advantages and disadvantages.

WHAT IS ARBITRAGE?

Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price.

There are two types of arbitrage:

spatial — when trading operations are conducted on different trading platforms, but at the same time;
temporary — operations are conducted on the same trading platform, but at different times.
SPATIAL ARBITRAGE

The most common type of financial market is spatial arbitrage. In simple terms, its scheme looks like this: the price of the same asset on two exchanges is significantly different. A trader buys this asset where it is cheaper and sells it where it costs more. The difference in the price of the asset goes into profit of the trader.

Spatial arbitration is possible solely because of the low efficiency of asset quotations within a separate trading platform in particular, and the system as a whole.

Due to the fact that the whole cryptocurrency system is based on decentralization, this provides an excellent opportunity for cryptocurrency arbitrage.

SCHEME №1. Use of cryptocurrency price difference

Using the cryptocurrency price difference looks like this:

On the cryptocurrency exchange Binance, 1 Bitcoin is traded at a price of 3500 dollars per coin. On the Livecoin exchange, the bitcoin price is $ 4000. The trader buys 1 BTC on the first exchange, transfers it to the second exchange and sells there. As a result, it makes a profit of $ 500.

DISADVANTAGES OF ARBITRAGE SCHEME №1

Ideally, everything looks great, but in practice, the resulting profit will be much smaller, since any cryptocurrency exchange charges a certain commission from the trader’s operations.

COMMISSION COSTS

Commissions may be charged for the following operations:

transferring funds from a personal wallet to a trading deposit at exchange 1;
depositing funds on the exchange;
the purchase of cryptocurrency on the stock exchange №1;
the transfer of cryptocurrency from exchange number 1 to exchange number 2;
the sale of a crypto on the stock exchange number 2;
when withdrawing funds from the trading deposit on the stock exchange №2 on a personal wallet.
Traders who use arbitrage operations necessarily take into account these costs, preferring to work with an inter-exchange spread in the amount of 2–3%. Additionally, there are various ways to reduce commissions.

LACK OF LIQUIDITY

Quite a serious problem can appear. Altcoin liquidity is rather low. It is impossible to buy or sell them in large volumes.

Professional crypto traders increase their profits at the expense of large trading volumes, which, by the way, makes it possible to minimize fees for trading and transactional operations. This operation will not work with many altcoins, which have an attractive difference in quotation.

In addition, it should be noted that arbitrage is not a secret for anyone, and you are not the only one, who is using this method. If the price difference appears and it is sufficient for arbitrage operations, the available volumes of such an asset are quickly redeemed. As a result, some traders won’t get any profit.

RISK OF MISSED TIME

As we have said, the essence of spatial arbitrage is that buying and selling operations should be carried out at the same time. That is, the smaller the time interval between the purchase of cryptocurrency on one exchange and the sale of another, the less the risk that the price of this asset will change, reducing or depriving the trader of profit. In the worst case, purchased cryptocurrency should be sold at a loss.

You are transferring a cryptocurrency from Exchange №1 to Exchange №2, but while you were making a purchase, unplanned technical work began on the second site, which is far from uncommon for cryptocurrency exchanges. Time is lost — lost of money.

In addition, the increased popularity of cryptocurrency has led to a negative effect. Network congestion has led to the fact that the speed of transaction execution has dropped significantly. As long as your funds reach the required place, the market situation can be changed dramatically, making arbitration on the chosen cryptocurrency meaningless.

SCHEME №2. USE OF EXCHANGE DEPOSITS

The second scheme is designed to solve the key problem of fast transfer of cryptocurrency between the purchase exchange and the sale exchange. Scheme 2 is based on the storage of funds used for arbitrage on deposits of a crypto exchange. Its most effective use will be investing in the medium and long term, as well as in the Pump and Dump scheme.

In other words, the funds do not need to be transferred anywhere, since they are already on the right trading exchanges.

For example, on two cryptocurrency exchanges you have deposits with 2 BTC and 100 Ripple each. When an inter-exchange spread appears in the Ripple / Bitcoin pair, we buy XRP on the first exchange for bitcoins, and on the second exchange we sell all XRP. After this, we align our deposits on both crypto exchanges.

SCHEME №3. TRIANGLE

Sometimes opportunities for arbitrage deals occur on the exchange itself. For example, if there are discrepancies between the quotes of several cryptocurrencies. Such an arbitrage scheme is called intramarket or triangular.

The second name of the scheme — triangular — is quite relative, because there can be more than three assets in a chain.

The disadvantage of intramarket or triangular arbitrage is the risk that during the selection of the optimal cryptocurrency chain their quotes may change. To minimize the risks, traders use unique cryptocurrency trading robots.

On some cryptocurrency sites there are special delays for such orders, which can adversely affect the profits of such arbitrage.

In fact, there are a lot of arbitrage schemes on the market. All of them, in one form or another, have already been tested on Forex. However, the market of cryptocurrency, on which more than one and a half thousand cryptocurrencies are traded, with its decentralization, at the moment, looks much more attractive for arbitrage operations.
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