Arbitrage trading is the practice of capitalizing the advantage of price differences of a single asset in two different markets. This trading method can be done on commodities such as oil, gold, and even cryptocurrencies.
The price differences between markets often happen momentarily on the market in different countries or are being operated by different entities. Since each market runs on a different platform, rules, and independent liquidity processes, these factors lead to a delay in price change and traders can capitalize on this opportunity to make a profit from the gap between market prices at which the unit is being traded at.
For digital assets such as Bitcoin, which is being traded internationally on various intermediary platforms called ‘exchanges’, these exchanges often vary in terms of liquidity and prices depending on the demand of users on each platform.
With the core properties of cryptocurrency which allow users to send and receive the assets over international borders with a minimal transaction fee, this makes arbitrage trading a viable and profitable method.
Traders need to monitor the price of the crypto asset on major markets such as Coinbase, Binance, Huobi, or OKEx. When the price fluctuates significantly, especially for that of high market cap coins, traders will need to move fast and buy on the lagging exchange, then send the coins to the leading exchange and resell them at a premium.
However, this strategy is very limited if the price is trending sideways, the gap between Bids and Asks spread tends to be narrow. For the best result, only perform this strategy when the market is in a clear up or downtrend.
Still, as speed and frequency are keys to the success of this trading method, modern technology and advancement in computing power make it easier to employ the strategy. Using computer bots to perform this simple task can help maximize the profit and perform more efficient and successful trades.
Arbitrage bots could detect price gaps on multiple exchanges simultaneously and execute the trades in milliseconds before the prices on lagging and leading platforms correct to the same level. Bots trading has become more popular in recent years, as they are easier to set up with pre-made tools and options. Applications like Cryptohero allows users to create automated bots directly from their mobile devices while users still have full control of their portfolios without risking any security compromises.
This method of arbitrage trading might sound easy on paper, but it requires close monitoring of the prices and experienced traders should only utilize this scalping technique when all conditions are met.