What is cryptoarbitrage
Cryptoarbitrage is a trading strategy, which is based on use of differences in the value of assets in different locations. For illustration, let’s look at an example that describes arbitration in a general sense.
You have 800 000 rubles.. Let’s assume the market price of the dollar = 80 rubles. You can buy $10,000 of your savings with your savings.
But you found a man who is ready to sell you dollars at the price of 78.5 rubles per piece.. So you will be able to buy $10 191.
Then sell at a market price of $80. And gain 815 280 rubles. 15 280 rubles – the net profit made simply by the fact that you took advantage of the misalignment of quotations.
In reality will still need to deduct the exchange commission, but it will not big: at most a few hundred rubles.
In the case of cryptocurrency the meaning is exactly the same. But it should be taken into account that bitcoin and altcoins are much more volatile assets.
That is, you have to act much faster.. In addition, it is worth considering the real difference in pricing on centralized exchanges (CEX) and decentralized ones (DEX).
CEX and DEX pricing
Centralized exchanges use so-called order books. These are electronic lists of orders to buy and sell from everyone.
In stock market slang they are often called a stock tumbler. In the middle of the glass you can see the best bid and ask price. Pricing is determined solely by supply and demand.
Decentralized exchanges do not have order books, they use automatic market makers (AMM’s).
In simple terms, it is the mechanism that determines the price of the assets included in the liquidity pool depending on& the supply in availability and proportion of assets.
Thus, the value of cryptocurrencies is determined not by the general market conditions, but by those originally set in AMM’s.
For example, let’s imagine a liquidity pool consisting of 100 million AVAX and 100 million SOL.
You wanted to exchange 1 million SOL for AVAX inside the pool. So SOL supply will rise and AVAX supply will fall..
What does this mean? SOL will fall in price within the pool, and AVAX will rise.
.
Since the price of assets in a particular AMM is determined specifically, and not market-based, there are often discrepancies in cryptocurrency values.
This and enables the implementation of decentralized cryptocurrency. He comes in many forms. Let’s look at the basic types.
Intra-exchange arbitrage
The simplest and clearest type of cryptocurrency arbitrage – in-exchange. It represents buying on one exchange, and selling on another – at a better price.
In reality, it is quite difficult to do. If you notice any difference in prices&of&a certain&coin,then you should& act& fast enough;because& the& price& is& changing& rapidly. Plus, do not forget about existing commissions.
It’s more realistic when you have two accounts on different exchanges and the inconsistencies are obvious. For example, you have an Kraken and Bistamp account..
You have 50 000 USDT at the first site, and 2 BTC at the second one. You see that bitcoin on Kraken is worth $24 000, and Bitstamp has risen to $24 400. You Buy Kraken 2 BTC for 48 000 USDT.
And on Bitstamp at the same time you sell your BTC for 48 800 USDT. That your total BTC account was unchanged: it remained the same, but your USDT account increased by 800 stabelcoins.
Triangle arbitrage.
Unlike the previous one, this type of arbitrage can be performed both within one exchange and several. It is& based on a mismatch of quotations of the three cryptocurrencies.
For example, you find discrepancies in prices of Cardano, Shiba Inu and Etherium.
First, 20 ADA tokens are exchanged into 1,5 million SHIB at one rate, then 1,5 million SHIB is exchanged into 0,05 ETH the other way and finally 0,05 ETH is exchanged into 21 ADA.
Triangular arbitrage in practice is quite problematic for a person. First, you need to find a discrepancy in three assets.
Secondly, calculate what will be the profit – it must cover the commissions.. Third, you need to do everything quickly, because the volatility of cryptocurrencies & nbsp;high.
Therefore, those who want to earn in this way, as a rule, use special bots for trading.
Geographic arbitrage
The same intra-exchange arbitrage but with addition of the geographical factor.. For example, there have been cases where the price of bitcoin skyrocketed in Iran.
This also includes the so-called kimchi award in South Korea.
This type of arbitrage can arise either due to abnormally low or abnormally high demand for cryptocurrency in a particular country, or due to sharp changes in the price of national currency.
Again, using geographical arbitrage, it is necessary to calculate all the commissions: withdrawal from one exchange, input to another, as well as transactional ones.
Statistical arbitrage
This is a complex method of trading based on several statistical, economic and mathematical models.
It is usually carried out with the use of robots. Trading in this way can be based on deviations in prices of tens, and even hundreds of cryptocurrencies.
Cryptoarbitrage risks.
It is often seen that arbitrage trades are risk-free. This is true, but only in part.
If we compare the risks of investors or traders who invest in cryptocurrencies, they are higher than those of those who make arbitrage trades.
Speculators buy and sell, relying on predictions. And no one can see the future.. A prediction can always be inaccurate, because it may not take into account all the factors.
The arbitrage deal, in turn, is based on what is clearly visible. There’s no need to delve into the intricacies of the market. You just need to see and do it quickly;
Nevertheless, there are three nuances to consider:
- First -commissions.. Deposit, withdrawal of cryptocurrency, as well as the commission of transactions will have to pay. All commissions must be taken into account. If they are more than your earnings on the differences in exchange rates, then the deal will not be worthwhile.
- The second -trading time is extremely limited because cryptocurrencies are very volatile. You may;notice differences in prices in exchanges, and half an hour later they may no longer be. It is necessary to act very quickly.
- The third -the safety issue.. If you will put your assets on a centralized exchange, you could theoretically be hacked and have your funds stolen.. This aspect is even more relevant for various cryptocurrencies.
And how to perform cryptoarbitrage?
How to do cryptoarbitrage
You can do it in person. Find discrepancies and conduct the transaction. Strangely enough, this is probably the most difficult way, because you have to take into account both the commissions and the speed.
Nowadays, there are quite a lot of different kinds of platforms that offer cryptoarbitrage. For example, at Cryptohopper offers arbitrage without transferring funds from exchange to exchange.
And the platform ArbiSmart, authorized by the European Union offers up to 45% profit per annum. Is it worth believing?
Let’s summarize. The strategy of cryptoarbitrage is to use the divergence prices of cryptoassets in different places.
Although it is less risky compared to trading, transactions still need to be executed quickly and subject to commissions. Cryptoarbitrage is often conducted with the help of bots.
This material and the information in it does not constitute individual or other investment advice.
The opinion of the editorial board may not coincide with the opinions of the author, analytical portals and experts.