If you have been familiar with cryptocurrency for a long time, then you must have acquired much knowledge about Bitcoin, altcoins, and various other terms including crypto arbitrage.
Now, what do you mean by cryptocurrency arbitrage? Well, if not, then don’t worry, we are here to explain this concept in this blog. In short, cryptocurrency arbitrage can be defined as parallel buying and sale of cryptocurrency. The main motive behind this is to generate profit from a price that is not in a balanced state.
Cryptocurrency arbitrage is rather a trade that brings you to profit by taking advantage of differences in the price of a similar asset on various cryptocurrency exchanges.
The existence of cryptocurrency arbitrage is only possible until the markets are imperfect. In short, a crypto arbitrage opportunities take place when you are lucky to make the best out of an opportunity to purchase anything for the minimum price, and then smartly sell it for price at a higher rate.
So, it is all about leveraging the price of a cryptocurrency on one platform and benefiting from the higher price of the cryptocurrency on some other platform. So, you can buy ETH at Binance at a price and sell it at Kraken for a higher price.
Two Types Of Cryptocurrency Arbitrage
There are two types of cryptocurrency arbitrage. One is between Exchanges and the other is within the solo exchange. It will be more clear if we understand them one by one. So let us start with:
Cryptocurrency Arbitrage Between The Exchanges
Between the exchanges is the common cryptocurrency arbitrage type, as it is akin to sports and fiat arbitrage. The motive is clear, that is to take advantage of the different prices on different exchange platforms of a similar coin. If you want to benefit from cryptocurrency arbitrage in between exchanges, then you have to follow some steps like Registering on chosen exchanges, and then on one exchange, you are supposed to deposit fiat and purchase any cryptocurrency like Bitcoin. Your cryptocurrency must be transferred to another exchange, and then for fiat, you need to sell your cryptocurrency. Finally, the profit will be withdrawn by you.
If you want to identify opportunities for cryptocurrency arbitrage between exchanges, then factors like geography, crypto coin listings and liquidity should be taken into account.
Within The Single Exchange
Coming on to another type of cryptocurrency arbitrage is within the single exchange, which is much akin to cross-currency arbitrage. Mostly, this arbitrage type is linked with forex trading. So if you want to gain profit from this inter-exchange arbitrage, then just like the previous one, you have to follow the steps for this crypto arbitrage also. Fiat deposit on any exchange is the first step, to begin with. After that purchase cryptocurrency X, and sell that for cryptocurrency Y. It will take more than one step. And then you can sell another cryptocurrency Y for fiat currencies like USDT or USD. Finally, profits can be withdrawn by you.
There is a way to find a fiat alternative with another cryptocurrency. Step 2 is supposed to be repeated multiple times with different cryptocurrencies. Hence, a polygonal arbitrage will take place instead of triangular arbitrage. So naturally, there are chances of the rise of diminishing returns with every forwarded step. This indicates that traders must timely analyze reward or risk.
Conclusion
So this is what you need to know about cryptocurrency. To summarize, the main reason behind the cryptocurrency arbitrage opportunity is to generate profit from differences in the price or when the market is not perfect. There are two types of crypto arbitrage, which is between the exchanges and other is within the exchanges. We have explained to you about the steps from both each in how to withdraw profits in the end. If you want to clear any more doubts regarding cryptocurrency arbitrage, then better log on to the Cryptoknowmics website. It is the best guide for all new crypto enthusiasts.