What Is Arbitrage Trading and How Works?

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The value of digital is not stable. It evolves over time, but the price can also vary across markets. This is the reason, for example, why the price of Bitcoin is different on Binance to Coinbase Exchange.

And although it may seem strange, it’s actually more common than you think. Digital currencies are traded across exchanges just like any other asset on an open global market. The different prices of the same digital currency on different exchanges mainly reflect the trading history of their users.

What Is Arbitrage Trading?

Although the concept of arbitrage trading has come into people’s consciousness in recent years, it is necessary to say that arbitrage has been the mainstay of traditional financial markets for decades.

Arbitrage Traders

However, it has to be said that the price differences are not too big, but even a small difference can bring profit. The so-called arbitrage traders work with these different prices, who know how to use these small price differences when buying and selling the same asset in different markets.

And although this method of earning may seem simple, it is not so. It must be said that trading on the arbitrage market is not for everyone. This process is quite difficult and there have to be calculate quite a lot of variables in the calculation of income and expenses. These are the so-called transaction costs, which are basically the costs of the transaction. This can be for example fees for placing funds in the market and withdrawing them. If you therefore decide to trade with cryptocurrencies, we recommend that you take a look at what pitfalls await you. For example, the documentary Trust No One: The Hunt for the Crypto King, which shows the risks associated with cryptocurrency trading.

But to explain it in more detail, let’s imagine that on exchange A Bitcoin costs 20 thousand dollars, while on exchange B the price of Bitcoin is 20.2 thousand dollars. So the potential earnings are $200. But you have to squeeze all the fees into this $200 to be in the black. This is a typical example of a crypto arbitrage trade.

It should be noted, however, that buying cryptocurrencies across different exchanges costs not only fees, but also time. The price of digital gold is constantly changing over time, and therefore many use various applications like triangular arbitrage crypto bot that automate this process for this purpose. By the way, there are currently more than 1,100 crypto exchanges where digital currencies can be traded. In many of these markets, the same currency is being valued differently due to constant fluctuations in cryptocurrency prices.

We Know Different Types of Arbitration

It should also be said that we know several types of arbitration. This is, for example, Simple Arbitrage, which involves buying a cryptocurrency on one exchange and simultaneously selling it on another. Probably the most famous one is Triangular Arbitration. This type of arbitrage trade involves three different currencies (or two pairs). The idea is to take advantage of the differences between how different markets value and convert other currencies. But Convergent Arbitrage can also be a good strategy. In this case, a trader buys cryptocurrency when a certain exchange or market undervalues it.

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