What is crypto arbitrage?
If you’re looking to make some extra cash, have some fun, and learn a little about cryptocurrencies in the process, then this post is for you! We’ll take a deep dive into what crypto arbitrage is and how it might be able to help you earn some money.
Crypto arbitrage can be defined as the simultaneous buying and selling of cryptocurrency on different exchanges or markets for a profit. Due to variances in prices between markets, these opportunities often arise. The main reason it is often possible to make a profit this way is because of delays in order execution and the time it takes for transactions to be confirmed.
One of the major ways crypto investment experts take advantage of this opportunity, however, is through trading bots and APIs. These are pieces of software that continuously monitor specific markets, and once they see an opportunity arise, they can initiate trades on their own. This happens as quickly as possible in order to take advantage of the price differences between exchanges, allowing traders to buy low and sell high pretty quickly.
This form of arbitrage is not new by any means. In fact, it has been happening in other financial markets for a long time now. However, arbitrage differences are significant now in cryptocurrency markets, and South Africans are uniquely positioned to take advantage of this. It can be very profitable to take advantage of the large profit differences, and trading bots are the easiest way to maximize profits.
As a disclaimer before we go further, I should point out that not all bots are created equal. Some are made by large companies that have ties to certain exchanges and currencies (such as Luno or Ovex), while others can be compiled by people with varying programming skills. Best practice is to avoid trying to execute these trades yourself as there are trading complexities that can increase risk. Arbitrage trades are best left to the experts.
Crypto arbitrage also has an interesting relationship to trading bots. While in many financial markets the use of bots is heavily frowned upon by regulators and traders alike, cryptocurrencies are still fairly new. As a result, very few regulations have been put in place just yet.
While there are many use cases for trading bots, it can be very disconcerting for traders to see orders being placed on exchanges they don’t control without their permission. The fear is that there will eventually be regulation that forces exchanges to close the loop and require all actions to be initiated from that exchange alone. This would put trading bots out of commission and render arbitrage opportunities non-existent.
As of right now, however, there isn’t any sign that this will happen. Some exchanges already have security measures in place to prevent automated trading, but many still allow it. This means that traders can still profit from the price differences between different exchanges without fear of losing their accounts or funds.
One final note on arbitrage: while many people believe that these price differences are caused by technical issues with certain platforms or problems syncing the blockchains across them, this is usually not the case anymore. The main reason for pricing variances has more to do with which currencies are available on each exchange. While it’s possible that technical issues or the malfunctioning of trading bots could be responsible for some price discrepancies, this is generally considered very unlikely.
As long as you understand how arbitrage works and how to put it into practice, you can earn significant profits. If you’re interested in learning more about crypto arbitrage and how to get started with it, use BetterMoney’s robo-advisor to help you find the best arbitrage investment opportunities.
Types of Crypto Arbitrage
Crypto arbitrage is a term that describes when there is a difference in the price of Bitcoin or other cryptocurrencies between two different exchanges.
There are three types of crypto arbitrage: relative, absolute and ‘arb skew’.
- Relative Crypto Arbitrage: When the price of Bitcoin or another cryptocurrency changes on one exchange but not on others, traders can buy bitcoin or another cryptocurrency from the cheap exchange and sell it on an expensive one to make money.
- Absolute Crypto Arbitrage: This happens when there is a difference in price between two exchanges at the same time. A trader can buy bitcoin on one exchange and sell it on another at the same time to make money.
- Another type of arbitrage is called “Arb Skew.” This happens when there are multiple cryptocurrencies being traded on different exchanges. You can compare the price of Litecoin or other cryptocurrencies on one exchange to Bitcoin (or any other cryptocurrency) on another exchange and make money through arb skew.
Crypto arbitrage can have an impact on the market as prices adjust to be more consistent. Arbitrageurs help adjust prices so there is no lag and that prices across exchanges are equal at all times. They don’t want to make a profit, they only want the price of Bitcoin or another cryptocurrency to increase as quickly as possible.