Top 3 types of cryptocurrency arbitrage

For many traders, arbitrage trading on the Forex market has been a source of stable profits. Meanwhile, this strategy can also be successfully applied to the cryptocurrency market.

Arbitrage is the execution of several transactions to buy and sell identical assets, the profit of which is derived from the difference in their value. There are two main types of cryptocurrency arbitrage:

  • Spatial arbitrage
  • Convergence arbitrage
  • Triangular arbitrage


Spatial arbitrage is the most common type on the financial markets is spatial arbitrage. In simple words, its scheme looks like this: the price of the same asset on two exchanges differs significantly. The trader buys the asset where it is cheaper and sells it where it is more expensive. The difference in the price of the asset goes to the trader’s profit.

Convergence arbitrage involves the use of an intermediate trading pair within an exchange. The rate in different pairs can also vary greatly.

Triangular arbitrage is a complicated strategy that involves trading across more than one trading pair.



№1 Spatial arbitrage


Interchange spread is a strategy that involves buying and selling the same cryptocurrency on different exchanges. For example, the price of BTC on exchange A costs $10000 and on exchange B it costs $11000. Buying BTH on the first exchange, transferring and selling it on exchange B will have a profit of $1000.

However, exchange platforms usually charge for buying, selling and transferring cryptocurrencies. Traders who use arbitrage operations are required to account for these costs. Also there is a risk to lose “Time” because it takes time to transfer cryptocurrencies between exchanges. 


№2. Convergence arbitrage

The second scheme is designed to solve the key problem of fast transfer of cryptocurrency between a buying exchange and a selling exchange. This is based on storing funds used for arbitrage on cryptocurrency exchanges’ deposits. It will be most effective when investing in the medium and long term.

For example, there are 2 exchange deposits with 2 BTC and 100 XRP both. XRP costs 0.012 BTC on exchange A and 0.0128 BTC on exchange B. Selling XRP for BTC on the second exchange and buying XRP on exchange A will grant you 0.08 BTC profit.

In this scheme the risks of losing time to perform transfers are excluded, but it should be taken into account that fees for trading operations and transactions have not gone anywhere, so the real profit will be less than the estimated one. Aslo in comparison to the scheme №1 you are limited to exchanges in which crypto is stored. 

 

№3. Intra-exchange or Triangular Arbitrage


Sometimes opportunities for arbitrage transactions arise within the trading floor itself. For example, when the quotes of several cryptocurrencies diverge. Such an arbitrage scheme is called triangular.
For instance, 1 BTC costs $8000. Buying XRP with BTC will grant you 8432 XRP. Selling XRP will result in $8235. This triangle resulted in $235 profit excluding the commissions that the exchange charges on trade transactions.
The second name of the scheme, triangular, is conditional because there can be more than three assets in a chain.

The disadvantage of intra-exchange or triangular arbitrage is the risk that cryptocurrency quotes may change during the selection of an optimal chain. To minimise it, investors use trading bots.


Conclusion


All types of crypto trading have risks and benefits. But arbitrage is one of the most attractive types of cryptocurrency trading because of the speed at which profit is generated and low risks compared to other types of trading.   

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