Crypto arbitrage trading is one of the easiest and safest ways to make profits in the crypto space. There are plenty of exchanges to take advantage of, which grants investors almost endless opportunities.
At least that’s what people say. Some of you have probably never heard of crypto arbitrage before, or, on the contrary, heard too much so and don’t know what to make of it. This article aims at explaining the essence of crypto arbitrage trading and why this income generating strategy might be the ultimate one in the crypto market.
What is crypto arbitrage?
First, we must understand why crypto investors came up with the idea of arbitrage trading. The crypto market is never static, and there will always be volatility. Sometimes just sitting idle is not the ideal approach – adapting to the negative market behavior surely sounds better.
Cryptocurrency is constantly being traded across hundreds of exchanges. It’s only natural that its price will tend to deviate from time to time due to supply and demand differences. This is where the crypto arbitrage essence lies.
Crypto Arbitrage is the process of spotting the difference in the different digital asset prices and taking advantage of those alterations by buying the asset at a lower price than selling it. Basically, crypto arbitrage traders make use of the price discrepancies and perform a sequence of transactions to make a profit from it.
For instance, let’s assume the price of Bitcoin on Binance is $19,000 and $19,100 on Gemini. In this setting, a trader should spot the price deviation, buy Bitcoin on Binance, and sell it on Gemini. This is an example of a successful crypto arbitrage trade.
Why is the price different across exchanges?
This is due to differences in the exchange types – centralized and decentralized.
Centralized exchanges. Centralized exchanges use a different method for pricing crypto assets than decentralized exchanges. The asset price on centralized exchanges is dependent on the latest bid-ask matched order. Simply put, we buy or sell crypto assets at a real-time price of the given asset on the exchange.
Decentralized exchanges. Things work differently on decentralized exchanges. Their “Automated Market Maker” system is designed to maintain asset prices on the same level with those on other exchanges. On DEX, traders are matched together in liquidity pools to buy or sell crypto at a definite price and amount. For instance, if you wish to trade ETH for BTC, you will need to find Ethereum/Bitcoin LP on the exchange. The assets in a pool are backed by mathematical formulas to keep their ratio balanced.
Crypto Arbitrage Types
Arbitrage Across Exchanges. The simplest form of crypto arbitrage. In this scenario, traders buy assets on one exchange and sell them on another exchange at a higher price. With this method, the price deviation can last only for seconds and it can be hard to sell assets in time.
Triangular Arbitrage. Via this method, traders take several cryptocurrencies and trade them on the same exchange. You can trade ETH, BTC and ADA by taking advantage of one of the assets being underpriced in relation to another asset. Thus, you will sell your BTC for ADA and then trade ADA for ETH. This method has more advantages as it is a faster and cheaper one as there are no fees on the same exchange.
In the next article, we will discuss the ultimate method of crypto arbitrage used and invented by Neosify – algorithmic crypto arbitrage powered by Matrix technology. We will explain how you can earn crypto rewards, which is no more or less than 36.5% APY, by simply holding your assets on a Neosify wallet. Join Neosify and let your crypto reload to a fresh start, with no regard for volatility.