Arbitrage trading has a long history and it has existed since the emergence of the financial markets around the world. It has provided lots of opportunities to traders who knew how to explore and utilize such market inefficiencies. Arbitrage trading has a deep history in practice and it still stands valid today.
There are limited options to earn through arbitrage trading in traditional financial instruments like fiat currencies because of the technological breakthroughs such as technologies correcting the price difference across different exchanges. However, the recent financial instruments like cryptocurrencies offer new avenues for arbitrage opportunities in cryptocurrency trading.
If you have been in the crypto industry for quite some time, you will notice that there is a difference in the prices of similar cryptocurrencies across different exchanges. Bitcoin (BTC) is the most liquid cryptocurrency in the world and the flag bearer of the cryptocurrency industry. However, even the price of Bitcoin differs across almost all exchanges worldwide.
Crypto arbitrage opportunities are galore in the crypto world but it may not be as simple as it sounds. Let's explore what is crypto arbitrage and how can you find these crypto arbitrage opportunities.
If you are wondering if crypto arbitrage trading opportunities do exist, let me assure you that these arbitrage opportunities in cryptocurrency are real and you too can make money from it.
There are tons of arbitrage opportunities in cryptocurrency. These opportunities have got many companies interested in capitalizing on cryptocurrency market volatility and price differences that exist across different crypto exchanges. Many traders have flocked to cryptocurrency trading recently for this exact reason.
A research paper titled "Trading and Arbitrage in Cryptocurrency Markets" quantified the volume of crypto arbitrage opportunities. The research paper mentioned that the cryptocurrency exchanges in Europe, Japan, Hong Kong, Korea, and the US are hosting most of the most liquid bitcoin exchanges in the world.
As per the research paper, the profits across all the popular bitcoin exchanges in Europe, Japan, Hong Kong, Korea, and the US were often more than $5 million a day. It was found that between December 2017 and January 2018, the daily profits had touched a figure of $30 million. Overall, the total market size of arbitrage profits was around $1 billion during the period between December 2017 to February 2018.
Read more about crypto arbitrage trading strategies in our previous blog.
The initial step of crypto arbitrage trading involves finding a difference in the prices of cryptocurrencies across exchanges. You will have to monitor multiple cryptocurrency exchanges simultaneously and keep doing calculations to determine the cryptocurrency with the biggest price difference.
If manual calculations are not something that you look forward to then you can also use an automated tool. Many automated tools in the market that can help undertake fast calculations to spot the biggest crypto trading opportunities at a fraction of the time.
In the current scenario, it is very unlikely to succeed in crypto arbitrage without any kind of scripts or bots. You will need them to assist you in gathering information and execute trades quickly on your behalf. That is how modern trading strategies look like. It is recommended that you learn to code or use a trading software if you are serious about crypto arbitrage trading or even crypto trading in general.
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Online price calculators can prove to be very useful in spotting crypto arbitrage opportunities. These calculators are available with many charts and maps which will help you make faster arbitrage trading decisions. It is also to be noted that even the online pricing calculators come with various options and hence, you must always choose the one that is the most reliable and appropriate choice as per your requirements.
Speed and price variations are key parts of crypto arbitrage. This means that the chances to make money through crypto arbitrage trading increases if you trade more number of crypto coins at a time or you trade on more crypto exchanges at a time. Hence, the profits and the number of crypto exchanges that you handle at a time are directly proportional to each other.
Triangular arbitrage technique is the strategy that occurs between single or multiple exchanges where you leverage the price differences between three cryptocurrencies instead of two. Many exchanges have multiple markets and they offer a multitude of quote currency options. This leads to a long list of triangular crypto trading opportunities that can be leveraged for taking advantage of market efficiencies.
You can adopt the following steps to engage in a triangular arbitrage technique:
#1. Start with one asset. Eventually, we will return to this asset after completing the triangular arbitrage loop.
#2. Now, you will trade to a second currency that will act as a connector between the first asset and the next asset in the triangular arbitrage loop. This step ensures that we do not transverse on the same path again.
#3. In the third step, you will trade to the third cryptocurrency. It will be a connecting bridge to both first and second crypto assets. Now, this second trade will lock in a profit without any risk because of the difference in the price across the three crypto trading pairs.
#4. Convert the third crypto coin for the original cryptocurrency.
There are many challenges in crypto arbitrage trading. It includes financial, legal, and technical challenges and you must factor these issues before you decide to explore crypto arbitrage opportunities. However, you can leverage the techniques mentioned in this article to succeed in crypto arbitrage trading if you have decided to go ahead with it.