Are you unsure of high-risk cryptocurrency trading strategies? The popular low-risk arbitrage trading may be best for you! Arbitrage trading is popular among crypto traders and helps realize profits from the barely noticeable price differences across different markets.
In this article, we’ll examine this strategy, consider the risks, advantages, and disadvantages of implementing it, and suggest a system to simplify its execution.
What Is Crypto Arbitrage Trading?
Crypto arbitrage is the simultaneous trading of a cryptocurrency from numerous exchanges, platforms, or locations to profit from the price difference between each source. It’s noteworthy that the profit realized in this strategy is relatively low in percentage terms. An arbitrage trader sells the same quantity of the asset that they buy elsewhere.
Types of Arbitrage Trading
There are three common types of arbitrage:
- Two-currency Arbitrage: This technique exploits the difference between various quotes of two cryptocurrency pairs rather than two cryptocurrencies within the same pair.
- Covered Interest Arbitrage: This strategy sees the trader capitalizing on the difference in two countries’ interest rates. Such traders have to account for their exchange rate risk through a forward contract.
- Triangular Arbitrage: Traders who deploy this tactic optimize the difference between three varying cryptocurrencies. They attempt to profit from these three by exchanging one of the coins for the other two before exchanging the cryptocurrency back to its original form.
How Does Crypto Arbitrage Trading Work?
- Arbitrage trading depends on your ability as the trader to exploit the price difference of an asset in varying markets. Arbitrage opportunities are typically fleeting; therefore, automated tools are common among arbitrage dealers.
- Suppose coin X appears on Binance and Coinmama, and the former quotes the asset at $5 per unit while the latter lists each unit at $4.50. One can capitalize on the fifty-cent difference.
- To capitalize on this price difference using arbitrage, the trader buys each unit of coin X at $4.50 on Coinmama and lists on Binance at $5, thereby earning $0.50 per unit. They may earn more or less, depending on the cryptocurrencies’ differences. What’s important is that the profit per unit covers the expenses per unit.
Common Risks Associated with Arbitrage Trading
There are no infallible strategies in cryptocurrency trading. The following are five common risks traders may experience as they arbitrage.
- Execution Risk: A significant requisite for optimum profit realization from arbitrage is that the two trades finish simultaneously. However, this expectation is unrealistic in most cases. Only one part of the deal executes more often than not, resulting in less than the trader targeted.
- Mismatch: Buying and selling a non-identical asset may cause a mismatch risk. This is because the blockchain may not allow for trading the same asset at varying prices at the same time in foreign markets. The trader has no alternative but to conduct the transaction, assuming that both assets have correlating prices.
- Counterparty Risk: Arbitrage may suffer counterparty risks when involving cash transactions. This implies that one of the parties in a transaction may fail to fulfill their part on time. The counterparty risk poses a terrible issue for a trader who conducts multiple trades simultaneously. An arbitrageur may suffer massive loss when numerous counterparties fail.
- Liquidity Risk: There are noticeable odds of an arbitrage getting leveraged. A trader may have to borrow money should a margin obligation suddenly arise or in the case of a non-identical asset. The trader may then be unable to recoup their investment due to a lack of sellers or inefficient markets.
- Assessment Risk: The assessment risk differs from other risks, as it doesn’t concern financial capability. Information arbitrage relies on the trader’s insight to properly evaluate an underrated piece of information to realize its significance.
Advantages of Arbitrage Trading
Arbitrage trading is usually safer than buying coins to hold. The strategy assures you of efficient, streamlined means to make profits. The benefits of arbitrage trading are:
- Lower Risk: Arbitrage trading lessens the risks associated with buying and selling cryptocurrency, thanks to the neutral nature of most arbitrage techniques in the market. Arbitrage trade presents numerous opportunities to profit when the market is heavily volatile — courtesy of widespread price differences.
- Uncorrelated Performance: Price-oriented arbitrage helps improve portfolio diversification, resulting in enhanced risk-adjusted-performance. An asset may earn you profit even in a bearish market if you recognize the appropriate information.
- Good for Everyone: Arbitrage trading improves market efficiency and liquidity. Thus, traders may make a profit and feel good simultaneously.
Disadvantages of Arbitrage Trading
- Leverage: The arbitrageur may suffer overconfidence, which may cause them to over-lever their moves. This often results in capital destruction for a long while.
- Considerable Costs: Taxes, slippage, and transaction costs incurred in buying and selling cryptocurrencies can be costly. Add the price you pay to secure reliable data.
- Capital: The price difference is typically minuscule in many arbitrage techniques. Therefore, traders may earn huge profits solely if they invest a significant sum of money and optimize their leverage with the utmost margin rates.
How to Profit More Conveniently from Arbitrage Trading
Crypto arbitrage trading requires a lightning decision-making ability and reliable information. Consequently, it’s recommended to use a resource that offers both. Obolon9 is an automated cryptocurrency trading system that provides 24/7 market surveillance and instant notifications when the market meets set parameters. Obolon9 offers the first 30 days of use for free.
Crypto arbitrage trading is a low-risk strategy among traders that consequently offers low profits. A person may have to invest a significant amount before realizing a considerable profit. The strategy may have its risks and disadvantages, but few crypto techniques offer less risk. Arbitrageurs may engage automated cryptocurrency trading systems, like Obolon9, for optimum trade results.