Review A Unique Crypto Trading Method To Increase Your Crypto Portfolio With Little Risk

Discussion in 'Crypto Learning Center (Library)' started by philipj, Oct 22, 2020.

  1. philipj

    philipj GrandMaster Crypto Guardian

    Those who are into trading know mainly about the usual trading of buy a crypto when they feel its cheap and sell at a higher price to make a profit. But there is a unique method that some few traders are exploiting. It is called abitrage trading.

    What is crypto abitrage?

    Crypto arbitrage is a trading strategy that takes advantage of how cryptocurrencies are priced differently on different exchanges. On Coinbase, Bitcoin might be priced at $10,000, while on Binance it could be priced at $9,800. Exploiting this difference in price is the key to arbitrage. A trader could buy Bitcoin on Binance, transfer it to Coinbase, and sell the Bitcoin—profiting by around $200.

    Speed is the name of the game—these gaps usually don’t last very long. But the profits can be immense if the arbitrageur times the market correctly. When filecoin hit exchanges in October 2020, some exchanges listed the price for $30 in the first few hours. Others? $200.

    There are basically two types of arbitrage

    1. Between exchanges

    This method of crypto arbitrage is to buy a cryptocurrency on one exchange, then transfer it to another exchange where the currency is sold at a higher price. There are a few problems with this method, however. Spreads usually only exist for a matter of seconds, but transferring between exchanges can take minutes. Transfer fees are another issue, as moving crypto from one exchange to another incurs a charge, whether through withdrawal, deposit or network fees.

    The price of Bitcoin can differ between exchanges. One way that arbitrageurs get around transaction fees is to hold currency on two different exchanges. A trader employing this method can then buy and sell a cryptocurrency simultaneously.

    Here’s how that might play out: A trader might have $10,000 in a US dollar-pegged stablecoin on Binance and one Bitcoin on Coinbase. When Bitcoin is valued at $10,200 on Coinbase but only $10,000 on Binance, the trader would buy the Bitcoin (using the stablecoin) on Binance and sell the Bitcoin on Coinbase. They would neither gain nor lose a Bitcoin, but they would be making $200 due to the spread between the two exchanges.

    2. Triangular arbitrage

    This method involves taking three different cryptocurrencies and trading the difference between them on one exchange. Since it all takes place on one exchange, transfer fees aren’t an issue

    So, a trader might see an opportunity in arbitrage involving Bitcoin, Ethereum and XRP. One or more of these cryptocurrencies may be undervalued on the exchange. So a trader might take advantage of arbitrage opportunities by selling their Bitcoin for Ethereum, then using that Ethereum to buy XRP, before finishing by buying Bitcoin back with the XRP. If their strategy made sense, then the trader will have more Bitcoin at the end than when they started.

    Trading risks

    There are several risks associated with arbitrage trading. One of these is slippage. Slippage occurs when a trader makes an order to buy a cryptocurrency, but their order is larger in size than the cheapest offer on the order book, causing the order to ‘slip’ and cost more than they expected to pay. This is a problem for traders, especially since the margins are so small that slippage could wipe out potential profits.

    Price movement is another risk associated with arbitrage. Traders have to be quick to take advantage of spreads when they form, as the spread could disappear within a few seconds. Some traders program bots to perform arbitrage trading, which has only added to the competition.

    Finally, traders must take into account transfer fees. Spreads are rarely very large for the major cryptocurrencies, and with tight margins a transferral or transaction fee could wipe out any potential profit. These tight margins also mean that any trader who wants to make significant gains must carry out a large number of trades.
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