These days it’s very unlikely to meet someone who has never heard of cryptocurrencies. However, many may still be surprised to learn that there are actually more than 8,100 different cryptocurrencies in existence, in addition to the most popular ones like Bitcoin and Ethereum.
The volume of exchanges and cryptocurrency markets is also impressive. At the time of this writing, there are 299 exchanges and 34 260 markets, which means that there are 34 260 different trading pairs available on 299 exchange platforms. Accordingly, there are plenty of opportunities for making a profit, too. Let’s consider one of them in more detail.
What is crypto arbitrage?
You might have noticed that the price for Bitcoin is always changing, and this is true for all cryptocurrencies – they’re extremely volatile. So, this is where the concept of crypto arbitrage came from: you buy a cryptocurrency on one exchange at a lower price and sell it on another platform where the price is higher. Thus, you earn from the difference in exchange rates.
There are many reasons why price discrepancies occur and why cryptocurrencies are so volatile in general. Here are a few of them.
Despite its global popularity and constant media attention, cryptocurrency is still an emerging market and is much smaller in size than fiat currencies and gold. For example, the total market value of gold in the world in 2018 was nearly $8 trillion. The cryptocurrency market, in turn, stood at $754 million in 2019. The smaller the market, the more even minor events can affect the price. If someone suddenly sells a large number of bitcoins, the price can drop significantly. Conversely, if a trader buys a lot of bitcoins at once, the price can skyrocket.
The media is heavily influencing cryptocurrency prices as well. Big news can improve or crash the market, which is why investors and traders always follow the headlines that appear in the media.
Is it a risky business?
In short, YES. But, as they say, no risk, no reward. Cryptocurrency arbitrage is not easy, however, knowing all the nuances, you can quite successfully participate in it.
The first risk is associated with market volatility and transaction times. Some cryptocurrencies fluctuate a lot and their prices can change while the trader is still executing the transaction. Thus, it is better to use special arbitrage software. The ability to make quick decisions is also a must.
Studying regulations in your jurisdiction can also help you avoid a lot of problems. Remember to pay taxes on your cryptocurrency income.
Another issue is the delays that can be associated with money withdrawal. Slow transfers can mean that the opportunity is lost by the time the transaction is completed.
Also, beware of exchanges that offer extremely low prices for cryptocurrencies. We know, the chance seems very attractive, but you should always double-check everything and make sure that the exchange platform is reliable.
5 things to know before participating in crypto arbitrage
You may have already drawn some conclusions from the listed risks. However, here are more tips for those looking to discover the opportunities of crypto arbitrage.
– 1. You need to carefully study the platforms through which you plan to participate in crypto arbitrage.
Read reviews from other traders, check how high the transaction and withdrawal fees are. It is essential for traders to consider all possible costs in order to make sure that in the end, they will receive the desired profit.
– 2. Make sure to find a suitable cryptocurrency trading platform with an arbitrage trading bot.
Using dedicated software will certainly speed up decision making and transaction processing. Software is usually built in such a way that it can analyze data from the exchanges, choose the most profitable deal, and execute transactions much faster than a trader could do manually.
– 3. Always double-check the coin you want to trade.
Sounds not so complicated, however, many cryptocurrencies have similar names and logos. If you mix up coins and send the wrong ones to the wrong wallet, you can lose them all. So, before trading cryptocurrency, make sure that you have chosen the correct coin.
– 4. Send a small transaction first.
On the one hand, you will have to pay fees for each transaction, but on the other hand, you significantly minimize your risks if you start with small transactions.
– 5. Ensure that exchange wallets are online and working properly.
Many exchange platforms offer their own way to check if a wallet is online. Such information can be seen on the deposit and withdrawal pages, through exchange platforms’ API, or even on a separate page.
This knowledge will help you understand the basics of crypto arbitrage. In this process, luck is not so important as the ability to calculate all the costs and the difference in cryptocurrency rates, quick reaction, and skillful use of an arbitrage trading special tools. Carefully study crypto arbitrage platforms, all terms of transactions, and double-check the names of the coins, and you will have a chance to succeed in this.