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Cryptocurrency arbitrage

Cryptocurrency arbitrage is a strategy for making money on the difference in prices of the same cryptocurrency on different exchanges or on the same exchange, but on different pairs with the same asset. If we talk about inter-exchange (the most popular) arbitrage, then its essence is to buy an asset on one platform at a lower price and sell it on another at a higher price, thereby making money on the difference. Cryptocurrency prices can differ on different exchanges due to many factors: trading volume, liquidity, supply and demand at a particular point in time.

If we talk about intra-exchange triangular arbitrage (a more complex type of such trading), then this strategy is that the trader uses price discrepancies between three different cryptocurrency pairs on the same exchange. The process begins with the trader buying one cryptocurrency for another, then exchanging it for a third, and eventually returning to the original cryptocurrency, while making a profit from changes in the rates between these assets. The essence of the strategy is that temporary discrepancies between the prices of different trading pairs may occur on one exchange.

However, arbitrage itself is a complex earning strategy, finding arbitrage opportunities can be very time-consuming and, as a rule, it is very difficult to achieve success “by hand”, so arbitrageurs usually use automated trading bots or programs to find and execute opportunities.

Types and markets of crypto arbitrage.

Inter-exchange arbitrage.

The most common type of arbitrage trading is inter-exchange arbitrage. Inter-exchange arbitrage is a trading strategy that allows traders to profit from the difference in prices of the same cryptocurrency on different exchanges. If you study the order book of the same asset on different exchanges, you will see that the prices at the same time almost never match.

This is where arbitrage traders come in, looking to take advantage of these small price differences to make money. Market inefficiencies here can offer opportunities to make money. How does this happen in practice? Let’s say the price of BTC differs between the WhiteBIT exchange and another platform. An arbitrage trader will look to buy BTC on an exchange where it is cheaper and sell it where it is more expensive. Speed ​​and reaction time are especially important in this process.

However, it is important to understand that inter-exchange arbitrage can have its own limitations and risks. Some of these include delays in trade execution, limited liquidity, and price changes in the market. Careful research and understanding of each exchange and market conditions, as well as effective risk management, are required.

Intra-exchange arbitrage.

Intra-exchange arbitrage is a trading strategy that allows traders to profit from price differences between the same cryptocurrency on the same exchange due to price de-correlation. If you find a difference in the price of the same cryptocurrency, you can perform buy and sell operations on different trading pairs. For example, if the price on the BTC/USD pair is higher than the BTC/EUR pair, you can buy BTC on the BTC/EUR pair and sell it on the BTC/USD pair to make a profit in fiat. When performing intra-exchange arbitrage operations, do not forget to take into account the fees and expenses that may arise when making trades. This will help you accurately calculate the potential profit.

Triangular arbitrage.

Triangular arbitrage is a trading strategy that is used in financial markets to profit from the difference in prices between three different assets. It is based on the principle that on different exchanges or currency platforms, asset prices may differ, and traders can take advantage of this difference to make a profit.

Advantages of cryptocurrency arbitrage.

One of the main advantages of arbitrage is that there is no need to predict future price movements. The arbitrageur already knows where the prices of the selected asset differ. He only needs to correctly execute the transaction. Speed ​​of action and speed of reaction to price changes are critical for successful arbitrage. The faster the purchase and, more importantly, the sale of an asset, the higher the chances of completing the transaction with a profit.

In addition, unlike traditional trading, cryptocurrency arbitrage allows traders to minimize the risks associated with price changes in the market. Since transactions are carried out almost simultaneously. To make it easier to make and find arbitrage opportunities, special automated bots have been created that can effectively perform most of the analysis and monitoring of the cryptocurrency market, finding the best arbitrage opportunities. However, such bots usually cost money, and their cost is usually high.