The value differential of crypto money can be very significant across various exchanges. This gives an incredible advantage and chance to arbitrage traders.
Let us know what arbitrage trading is:
When it comes to financial market spaces, arbitrage trading indicates a process of simultaneously dealing (buy and sell) on two different exchanges (which have listed that particular commodity or equity or asset) to produce a profit from the value differential found on these two exchanges.
Let us take an example, and if exchange A is trading a particular security asset at USD 100 and the same asset is being traded on exchange B for USD 99, a trader can purchase the assets for USD 99 on exchange B and sell it for USD 100 on exchange A.
In reality, what keeps the market alive, productive and working is the arbitrage activity. The market makes sure that by the end of the day, the value of assets on the exchange across the market should be maintained and uniform, or else, arbitrage trades would enter the gap and capitalize on this gap to earn profits.
In the securities market, arbitrage trading is done by using high-frequency trading software. These software or programs are built to seek arbitrage opportunities across the market and accordingly completes the execution of the trades to help investors earn profits. Hedge funds investors or retail investors and proprietary trading companies make use of these types of computer programs.
Let us know crypto money arbitrage:
As value differential for cryptocurrency can be very expansive across the exchanges, there is an adequate space to make profits from arbitrage trading in the digital resource space. Let us not ignore the fact that, the biggest cryptocurrency in the world (by market capitalization) is traded on different exchanges at different values.
The geographical distance shared by the exchanges would also be a factor to consider. Last year, the greatest crypto exchange in Zimbabwe’s named Golix was trading in Bitcoin at a 30 to 40% premium to the global market value. That was on the grounds that there was more interest for bitcoin in Zimbabwe because of its economic environment, however, fewer alternatives to buying the digital form of money than in other nations. Subsequently, the price of the Bitcoin was getting traded higher in the Southern African country.
Having said that, the value differentials in the cryptocurrency can also be witnessed on exchanges which come under the same jurisdiction. And such type of exchanges can be more effectively used for arbitrage trading than trading across the borders. There exists no additional money loss while getting the money converted into fiat
These differences in the same crypto assets on the different exchanges are occurring due to lack of liquidity, the absence of globally accepted cost referencing measures, and the inefficient fund transfer procedure between two exchanges.
Who are the primary crypto arbitrageurs?
If one wants to earn profit from undertaking arbitrage trading in bitcoin and other cryptos, he/she will need a huge amount of capital at the disposal. The key players in the crypto arbitrage space across the worldwide market are – first, whales and second is hedge funds. Whales are those who were in the first few people accepting cryptocurrency in its earlier phase itself and hence now has a considerable worth in their hands.
These people always trade in big amounts to earn big profits ( from small differentials too). These people are well aware of how to direct exchange and experience enough to locate the liquidity in the market to successfully implement their arbitrage strategy.
These whales are ready to go after the digital forms of assets too (which are currency focused). Crypto hedge funds have the capital and the assets, and a few of more than 225 specialized funds in this field use this methodology as a significant aspect of their venture procedure.
Would it be a good idea for you to learn and use this trading technique?
In case you are a small investor, it is very hard to deal in an arbitrage trading and that too in the crypto market. It will demand a huge capital for this technique to turn out to be profitable. For this strategy to work the investor needs at least USD 100,000, to begin with, however, even after this, the potential profits would be fairly little. No wonder they say it is a rich man’s game.