WHAT IS CRYPTOCURRENCY ARBITRAGE?
Arbitrage is the simultaneous purchase and sale of an asset in different markets to benefit from the price difference between those markets. In a highly simplified example of how cryptocurrency arbitrage works, you would look for a specific currency that is cheaper in Exchange A than in Exchange B. You then buy the currency in Exchange A, sell it for a higher price in Exchange. Exchange B and the coin is pocketed. difference.
The concept of arbitration negotiation is not new and has existed in the stock, bond and currency markets for many years. However, the development of quantitative systems designed to detect price differences and execute operations in separate markets has made arbitrage operations out of the reach of most retailers.
However, arbitrage opportunities still exist in the world of cryptocurrency, where a rapid increase in the volume of transactions and inefficiencies between exchanges cause price differences to arise. Larger exchanges with greater liquidity effectively drive the price of the rest of the market, and smaller exchanges follow the prices set by their larger counterparts. However, smaller exchanges do not immediately follow the prices established in the larger exchanges, which is where arbitrage opportunities arise.
How does cryptocurrency arbitrage work?
Arbitration is generally possible thanks to a difference in trading volumes between two separate markets. The reason behind this is simple: in a market with high trading volumes where there is a reasonable liquidity of a particular currency, prices are generally cheaper. Meanwhile, in a market where there is a limited supply of a particular currency, it will be more expensive. By buying the former and selling instantly to the latter, traders can theoretically benefit from the difference.
However, arbitrage opportunities also exist in the opposite direction, where you would buy in a smaller exchange and sell in a larger exchange. The recent increase in the popularity of the cryptocurrency has led to a dramatic increase in trading volumes in many exchanges around the world. These exchanges are not linked, and a low trading volume in some exchanges may mean that the indicated price does not adjust to the exchange average immediately. As a result, this has seen the creation of price differences that arbitrators could exploit.
The most famous example of the differences in cryptographic exchange prices was a phenomenon known as the “prima kimchi” which, in January 2018, saw the price of bitcoin (BTC) in South Korea rise to more than 50% more than the global prices.
How to do it?
The most basic approach to arbitrage cryptocurrency is to do everything manually: monitor markets to detect price differences, and then place your operations and transfer funds accordingly. However, there are several cryptocurrency arbitrage bots available online that are designed to make it easier to track price movements and differences. Online or mobile business applications, such as Blockfolio, can also simplify the market monitoring process.
It is also worth noting that hedge funds are moving more and more towards the sphere of cryptocurrency. For example, the Singapore Hedge Fund Kit is raising $ 10 million for an encryption arbitration fund and will join the more than 80 crypto hedge funds that were launched in 2017.
There are multiple strategies that arbitrage traders can use to earn profits, including the following:
Simple arbitration. Buying and selling the same coin immediately in separate bags.
Triangular arbitration. This process involves taking advantage of price differences between three currencies. For example, buy BTC in USD, sell it to earn EUR and then change those EUR to USD.
Convergence arbitration. This approach involves buying a currency in a stock market where it is undervalued and short selling the same currency in another stock market where it is overvalued. When the two separate prices are at a midpoint, you can benefit from the amount of convergence.