Cryptocurrency Arbitrage. How to Make Money on the difference in the cryptocurrency rate?
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Cryptocurrency arbitrage. How to make money on the difference in the cryptocurrency rate?
Why cryptocurrency arbitrage is not suitable for beginners, what are its features, and what you need to pay special attention to are told by BitXmi experts.
Traders use the difference in rates on cryptocurrency exchanges to make money. The meaning of such trading – arbitrage – is to buy an asset cheaper on one exchange and sell it at a higher price on another. In theory, the concept looks simple, but in practice, there are a lot of nuances that can ultimately deprive a beginner of a deposit.
Arbitration is not for beginners
Cryptocurrency arbitrage is more suitable for experienced traders who may be new to digital money but already have experience in trading other assets. Now no one is engaged in manual arbitrage, for this, they use trading bots – programs for automatically concluding transactions according to predetermined conditions.
For arbitrage, you need experience in writing a connector (software for connecting to a site where assets are traded) to exchange and trading strategies, as well as the ability to write good software for yourself and use good servers.
The difference in the rates of liquid instruments on the exchanges is insignificant, therefore large sums of money are required for significant earnings in arbitrage. In addition, it is difficult for private players to compete with large institutional investor companies that use robotic schemes to track profitable patterns.
Features of cryptocurrency arbitrage
One of the features of price arbitrage in the cryptocurrency sphere is the regular appearance of new platforms, which competitors do not yet know anything about. In addition, a situation with privileged access to exchanges is not excluded, because a trader, for example, got to know the owner of the site, and can agree that his access will be a little faster.
Any large trader can influence the quotes of one of the exchanges since the markets have huge volatility and little liquidity. This leads to situations for arbitrage more often, but at the same time, the volumes are less.
Types of cryptocurrency arbitrage
The most common type of arbitrage is statistical, or the so-called pair trading. The point of statistical arbitrage is to find instruments with a high correlation with each other. This type of arbitration can even be carried out manually using the existing functionality of trading terminals. Another type of arbitration is the Intermarket.
Intermarket arbitrage is when you see the difference between the prices of one instrument in different markets and go long on one and short on the other at the same time. As soon as this difference becomes zero, you close both positions. In practice, such arbitrage operations require a very fast communication channel and special software.
There is also a calendar arbitration – it is more accessible and also involves the opening of two oppositely directed positions in contracts with different expiration dates. For example, buying April Bitcoin futures versus selling May Bitcoin futures. Thus, trading takes place not with a separate instrument, but with the difference between them, or the spread. Before the expiration of the April contract, you can “catch” small fluctuations in such a spread. However, such work will also require at least good software, because it is impossible to do it manually, BitXmi experts warn.
What do you need to enter arbitration?
To find the first successful entry points, you need to start tracking rates on different exchanges, as well as learn to predict their dynamics. Before making transactions, Bitxmi experts recommend studying the commission sizes of various sites in order to really make a profit. Experience with working on different crypto-exchanges will be required in order to take into account their peculiarities and the speed of transactions since during arbitration all actions must be performed as quickly as possible.
Disadvantages of arbitrage trading
Crypto exchanges, where the rate is very different from the market average, are often either fraudulent or have certain problems. It will be possible to make money for such sites, but to return it back is no longer a fact.
When working with trading bots, experts advise you to be as careful and accurate as possible, since it is very difficult to choose an automated system for arbitration. Each individual bot works with a different set of platforms; there are a large number of fraudulent bots on the market that take away earnings. It will be difficult for a novice trader to conduct a minimal technical audit to check the integrity of the bot.
Another point worth focusing on is the internal rules of exchanges. In addition to commissions, there may be other restrictions, for example, not every site can withdraw purchased assets in a few minutes.
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