The trader must make sure to increase the tools that are available at his disposal to improve his returns. This is not very easy to do because it takes time, knowledge, and consistent practice.
Successful traders know that where there is movement and a rise and fall in prices, that is where the most value can be gained. For there is action in these markets, and one can take their rewards in a time of great movements up and down.
Experts understand that arbitrage opportunities only exist in helter-skelter markets, not in sideways situations. So, they wait and wait some more while allocating funds all the while to their favorite digital assets in the meantime.
They realize that the crypto assets industry varies from the age-old financial industry in that many concepts such as the efficient market hypothesis and other factors remain constant. Further, many have entered into the fray and have conducted discoveries into tools, methods, and tactics to plunder the traditional financial sector.
Alas, it is not so for the cryptocurrency industry where one can still find serendipity and make a few more bucks if they know what they are doing. Thanks to its general inefficiency, the current crypto market presents vast arbitrage opportunities at the present moment.
Let’s take a look at a few of these today.
The Arbitrage Opportunity
What is the arbitrage opportunity? According to a few people, they are everywhere you look, you merely have to realize it. The first step then is to gain an understanding of the general markets and where to look for opportunities. The next step is to act on these realizations in an expedient and efficient manner.
Sure, this easier said than done, here are a few ways to seize the moment and drill into these potential goldmines.
Your mind will have exposure to a few elementary arbitrage concepts present in the current crypto asset world. By the time you get to the end of this particular piece of work, you will see how arbitrage matters, how to act on it, and the tools you should utilize to streamline your operations.
There are several arbitrage opportunities that you can take advantage of and so we will walk through them so that you have a moderate understanding of the entire crypto arbitrage landscape.
What Is Arbitrage?
Arbitrage is a concept that is applicable in foreign currency markets, traditional stock assets, commodities, and other financial markets like the rapidly emerging cryptocurrency industry.
The simple concept present within arbitrage is to purchase one asset and sell a similar type of asset in a different market arena for a great price. This action lets speculators view and generates money on the variance in asset prices across the various market spaces and lets them finalize the opportunity.
The Main Points to know about General Arbitrage
- Arbitrage takes place when one buys one type of investment unit in one space and sells it another space, for a wonderful price.
- The trade exists because the buyer sees a quick opportunity in the variance in the same investment unit across different speculation spaces.
- Speculators aim to continue to take advantage of arbitrage situations by purchasing an investment unit when the asset price is lagging in a particular arena due to one reason or another.
- Arbitrage opportunities, in a sense, carry lower risks because of the fact that the speculator knows that the gains are locked in if one acts fast.
This concept revolves around the simple act of purchasing an asset in one specific market and divesting it to a different trading space at the same time, locking in profits immediately.
They might look complex to perform because you are selling it in one of them and buying it another one; if not executed correctly, it can cause problems, and you can take a hit in your portfolio. But those who have experience and conduct it regularly notice that it is easier to pull off than other asset executions.
The simple point here is that it is all about the differential.
Is Crypto Arbitrage Different?
You may wonder, what is crypto arbitrage? Does it differ in any way from the traditional market? Cryptocurrency arbitrage is merely conducting the purchase in one market and divesting in another market within the cryptocurrency domain.
The main idea is to spot inefficiency and ensure to take the opportunity to make a profit as quickly as possible as the inefficiency will not stay for too long. In crypto assets, you can notice that the price variance present in exchange can differ from one present on another entity.
Sometimes you may notice that the price is different for the same asset with varying prices for different pairs. Here is how you find out how much you can earn with these situations and how you can improve your process to gain profits.
How to Solve for Arbitrage
The first step in identifying the arbitrage opportunity in a specific market is by looking at the high-value point bid as well as the least ask digital asset value. If you notice that the bid value on one entity is more than the ask value on one entity for a specific cryptocurrency, congratulations, you now have an arbitrage situation.
Thankfully, you can calculate the potential earnings and if you should enter into a trade or not. The first aspect you must recall is that when you size the trade situation, you will notice that you are taking up the order book. For instance, you will see that there is an overlap in the order book. The bid value within one space is more than that of the ask value in one entity.
One must execute the trade action, then the order book will become smaller because of the action. Because you are absorbing the asset price.
You will capture a slice of the total value.
That is why it is necessary to always look at the opportunities present within the system, size them up, and see if they are worth pursuing. Run scenarios and see what the best possible action is before you take any actions.
Let us look at how the process works.
The Arbitrage Process in Two Types
The first type is: Simple Arbitrage
What is simple arbitrage? Well, that is the action of acquiring and divesting assets as noted before. All you do is purchase the asset in one space and then sell it in another sooner than later.
The faster the trade process, the better it is for you as you can potentially capture more of the pie.
You don’t need to conduct any additional actions when pursuing this strategy. All you must do is generally switch the units of investment by purchasing in one area and selling in the other area.
The second type is: Triangular Arbitrage
What is Triangular arbitrage? It is a bit more complex. It is a situation that takes place on one single entity or several platforms where the price fluctuates across several crypto assets and presents an arb scenario.
Many entities have different markets with many different values present. This can make it to where you have a wide base of triangular trading situations that one can utilize to generate value amid the lack of efficiency.
Let us take an example:
- We have three different asset pairings on one entity.
- The first pair is XTC/ETH, then XTC/BTC, and finally BTC/ETH.
What is the speculation scenario?
- Start with one crypto asset. This asset is where we go back to after the whole execution is done.
- Execute a trade for the second cryptocurrency which is the bridge to the first one and the last one in this triangle.
- Then, you execute a trade that bridges the first and the second one. This next one provides the riskless profit because of the variance in rates present in all of the units.
- Lastly, switch the final value back to the asset you started with.
Let us say, you start with 2 BTC. You would measure the opportunity by looking at the bid and ask values for each specific pair. Remember that one specific one may utilize the asking value and then we will divide the second pair ETH, by the XTC to understand the ratio.
Once you do so, you can multiply and divide the asset values to get the final answer of what you can end up with. If your BTC value is higher than what you started out with while you run your scenarios, you can find that it can be feasible and can execute the triangle trade.
As said earlier, it can be done within one entity or several entities.
How Should You Move Forward?
- Obtain Funds and Input them into a trading space
The first step is to accumulate enough funds to place them into an account on the right platform. You would divide these funds and make sure to input them into two accounts on two different entities. You would make sure to use these monies to buy and sell when you see the right spots to do so. The reason why you want to pre-fund several accounts is to make sure to have everything ready to go as money movement can take time.
- Notice Scenarios To Profit
You can look at opportunities by merely looking at price variances across different facilitation hubs. You know that you should view the highest bid point and lowest ask point, then notice where they intertwine. The intertwining places is where an opportunity is present.
- Measure the Scenario
You don’t want to chase after every single opportunity, just the ones that make the most sense. Measure the option for profit by conducting the buys and sells and understand how it will play out, accounting for the order book shrinkage.
- Conduct the Trade
Conduct the action by trading on the different exchanges. Keep on doing so until the opportunity dissipates.
- Repeat
You will look for other opportunities and conduct it again. As you continue to do so, you will swim in profits and be joyous.
Risks to Watch
This is not a risk free situation every single time. Remember that you do have to account for transaction costs.
You must always think about your transaction costs when engaging in any trade. Transaction costs are a critical part of the situation because they make some trades negligible and not feasible. Excess transaction costs create less profit and negate the value of the action.
Experts also note that price variances present within a market or across different markets can be slim. That means that investors must look at arbitrage opportunities when capital allocators have larger funds to play, thereby seizing more profits.
Risks Specific to Triangle Movements
Remember that risks present in the triangle movement occur due to the steps present within the process. For instance, you would realize from the explanation above that one can easily have quite a bit of risk if each step does not go off without a hitch.
The constant movements and transaction costs can add up and become a problem without the right tools in place to minimize human errors.
Automate the Process
Does this seem like it is tedious and could take some time to execute regularly? You are correct, it could certainly easily turn into a day job and even a night job.
That is why it is essential for you to realize that it is possible for you to automate it with bots and tools in this similar vein. There are those who turn to the right level of infrastructure to bring about a seamless execution of this arbitrage method.
You don’t want to invest in the infrastructure yourself because it will take quite a bit of time and money. Most people will find that it is not simple to do so and not viable over the long-term.
That is why the different platforms will provide the infrastructure, products, and features like application programming interfaces to enables speculators, traders, and investors to connect to exchanges and trade in an automated fashion.
Individuals can find open-source programs that will conduct these opportunities by conducting long/short arbitrage actions on bitcoin speculation sites. These open-source solutions will note that it seeks price variances, purchases long on an entity, and sells the asset short on the other one.
The automated entity will seek a price gap and leave these positions when a profit is made.
The question with these tools is always authenticity, reliability, and effectiveness.
Everyone always thinks that one will not open source any tools that will certainly capture gaps and make money. If one were to think about it even deeper, the program seeks out inefficiencies, takes advantage of them, and accumulates profit. The more who choose to start and deploy these programs, the less inefficient the market will be.
But these tools are just that, they are tools, and they rely on operators to input the right parameters for the right results.
Indeed, specific programs can go and provide real-time, live options to speculate across various speculation spaces and capture real value.
It could be a fantastic tool because it saves you time, money, and helps you minimize mistakes. The better the program, the better depth of insights, information, and market information that you have access to make the best decisions.
A few of these will also have different websockets and ways to subscribe to many different markets, enabling you to take advantage of the opportunities that arise.
Some of them even help you connect to all trading entities within one integration, enabling utmost simplicity.
Finally, as they get better, more programs will support the monitoring of accounts and wallets, enabling you to track balances painlessly. Remember that you have the option to tap into these tools and improve your efficiency in the crypto asset market.
Conclusion
The crypto arbitrage strategy is a great one that comes with minimal risks. The profits can be decent, and it can provide good results over time.
It is not a get-rich-quick strategy, but it is one that one can rely on for consistent profits in many situations.
You must be careful when employing these strategies and do so even though it has minimal risks involved.
It is also a strategy that you can initiate with automated programs. These programs can provide simple zero-risk arbitrage, simulation options, prime for volatile situations, and may even offer customization abilities. For instance, some people may want to extend the application, and some black box programs won’t allow that.
A few programs will have integration with a wide variety of exchanges as well, so it brings about a great deal of options. But as always, caution is needed in all aspects of the process so that you can grow and build your portfolio value.