Arbitrage trading involves exploiting the different prices among different exchanges. Since its existence, traders have been taking advantage of arbitrage between markets. Analyzing exchanges such as Bithumb, price differences between some of the cryptocurrency coins were as high as 40-50% at certain points during the last bull run in the end of 2017.
With arbitrage you buy coins at one exchange and then sell it for a higher price at another exchange. At the end, you realize the profits made from trading after deducting transaction costs.
The distributed nature of cryptocurrency and the interplay between securities, anonymity, and availability continues to create a persistent market. So, why does arbitrage trading exist in cryptocurrency, and will it continue to remain profitable as crypto becomes more mainstream?
There are many exchanges that are available for cryptocurrency trading, but maintaining a level of scalability, and speed in these exchanges is extremely difficult. API connectivity, which is essential to arbitrage trading with bots, has often proven to be highly unpredictable at times. This can lead to more opportunities for spread between different tokens.
Everyone in the cryptocurrency space can attest to the fact that there is a massive proliferation between different cryptocurrencies. According to Coin Market Cap, there are currently over 1000 cryptocurrencies, and more being created every week.
Data breaches have always been around, especially since most of the popular cryptocurrency exchanges are centralized. Mt. GOX was hacked for over $473 million worth of bitcoins. CEX, Bitfinex, CoinDash ICO, Ethereum DAO were also hacked for large amounts of money in the past. There was also the recent, infamous BitGrail hack, in which $170 million dollars worth of Nano (XRB) was stolen due to poor security within the exchange.
Big players in the cryptocurrency world are moving to locations with more favorable conditions due to heavy regulations by certain countries such as China and India. You’ll see countries which are safe havens for cryptocurrency trading have a much higher price due to higher demand. Also, since cryptocurrency is decentralized, there can be no true dominant authority over the industry. And more exchanges will arise and continue to be established as the industry evolves over time.
Right now, there is no anonymity from local banks. Transferring large sums of money from local banks onto cryptocurrency exchanges is difficult. Cryptocurrencies have made the big players need to address the current problems with money transfer. However, this will take a very long time and banks are incentivized with transparency, compliance, and safety as opposed to anonymity and speed.
The first step to executing an arbitrage deal is to store your coins on different exchanges. Diversify your coins on different exchanges such as Kraken, Gemini, Huobi, Bitfinex, etc. in case an opportunity arises for arbitrage.
Then you must monitor different exchanges and coins for arbitrage opportunities you can capitalize on with your bot. As soon as an opportunity comes up, you can setup your bot with the exchange API to automatically trade the coins you’re currently holding into the coin that is to be arbitraged, and then transfer it onto the exchange with the higher price to be sold at profit.
You can use our arbitrage tool, one of the trading tools in our Lunar Labs suite to find out which coins have a substantial amount of difference between different exchanges. You can get access to our beta which is launching soon by signing up below!
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