What is Arbitrage Trading?
Simply put, arbitrage is about buying something in one exchange and selling the same instrument in another exchange at a higher price, thereby earning profit. Crypto arbitrage works on the same principle. Due to multiple reasons like price fluctuations, liquidity provider, lack of depth in the market, etc., a coin is often simultaneously available at different exchanges at different prices. A trader can buy the coin from the exchange, offering it at the lowest price, and sell it on another exchange, where the price is higher, and earn a profit. The process whereby the trader buys crypto from one exchange and sells the same on another is called Cross-exchange arbitrage. Crypto markets are volatile, and the price of the assets differs significantly among exchanges. Also, crypto trading happens 24/7, and these are global transactions. A trader can enter and exit an arbitrage in a very short span, often within seconds, and unlike other kinds of trading, there is no predictive analysis required. These reduce the trading risk.
Things to check before getting into arbitrage trading:
Transaction fees: Withdrawal and depositing of cryptos involve transaction fees as well as trading fees, and such overhead costs while executing trades and transfers can eat into the profit. These fees vary from exchange to exchange and even fluctuate, and one needs to check for the lowest rates. One can also deposit a sufficient amount of crypto holdings simultaneously on multiple exchanges and thereby dodge not only the deposit and withdrawal fees but also save time. During arbitrage trading, one can then reshuffle the portfolio and capitalize on the opportunity by only paying maker-taker fees, which are nominal on high-volume trading.
Timing: Arbitrage trading is time sensitive as the price disparity between exchanges is short-lived, and it can take 10mins to up to an hour to get a transaction confirmed on a bitcoin blockchain. One needs to act swiftly to make a profitable trade and also opt for blockchains with high transaction speed. Also, crypto exchanges often have outages and AML checks; it is not uncommon for exchanges to limit the transaction of a particular crypto. These negatively impact arbitrage trading opportunities.
Hot wallets: Arbitrage trading requires one to store coins across several accounts to make swift transactions, and if the user holds funds in hot wallets, such as MetaMask, Trust Wallet, Coinbase Wallet, Exodus, Edge Wallet, etc., with multiple exchanges, then the arbitrage opportunity can be cashed on to the optimum.
