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Arbitrage: Capitalizing On Volatility Of Crypto
By Laxmikant Khanvilkar
Crypto arbitrage trading has become a popular way for investors to capitalize on the volatile nature of cryptocurrencies. It was put to best use during 2021 when the Bitcoin price scaled above $69,000. The idea behind arbitrage trading is to take advantage of the price difference between exchanges. As the cryptocurrency market changes, arbitrage trading becomes increasingly lucrative as it allows investors to capitalize on the price discrepancies between different exchanges.
For the benefit of the beginners the term ‘arbitrage’ means taking advantage of price inconsistencies between different markets for an asset to generate risk-free profits.
Let’s assume an asset A is available for trade in two different markets, market Y and market Z. If it is traded at 100 in marketplace Y and 105 in marketplace Z, one can enjoy a riskless 5% profit opportunity excluding transaction cost.
Similar benefits are available in cryptocurrencies as well. But before diving into cryptocurrency arbitrage, let’s first understand how cryptocurrencies are traded.
Cryptocurrencies are mostly traded in centralized exchanges. Users can bid or ask for the cryptocurrency that they want to trade and once a particular buy and sell order matches, the exchange of the assets are realised between buyer and seller.
Based on this logic, cryptocurrencies are traded 24/7 around the world. The same cryptocurrencies are traded on thousands of different exchanges.
Cryptocurrency arbitrage means profiting by simultaneously buying a cryptocurrency from an exchange and selling it on a different one with a slightly higher price.
The concept of crypto arbitrage trading is relatively straightforward.
All one needs to do is find the price difference between the two exchanges and buy the digital asset on the exchange with the lower price. Once they buy the asset, they can then sell it on the exchange with the higher price and make a profit.
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