Cryptocurrencies, like bitcoin (BTC), are known to have a growing list of remarkable uses in today’s world. Among the widespread use cases of these virtual assets includes utilizing them for extending charitable efforts, transferring money, cryptocurrency loan applications, investing in markets, and simply making payments in day-to-day monetary transactions.
Aside from these uses, there is an approach used by a lot of crypto traders, apart from buying and selling. This popular method is called arbitrage trading, or in this context, cryptocurrency arbitrage.
The term “arbitrage” is the “purchase and sale of an asset in order to profit from a difference in the asset’s price between markets.” Simply, arbitrage is like buying an item or an asset in one market and then selling it in another market at a higher price. The people or investors who engage in arbitrage are commonly known as arbitrageurs.
This method is done in various markets outside the cryptocurrency world. Let’s say, for example, you bought a watch in one market at 60 USD. Upon checking other online markets, you’ve discovered one platform where it is sold at a higher price. Since there’s an available market that sells the item at a higher price, you place it on sale on that website at, let’s say, 75 USD. The difference in price from how much you bought it and how much you sold it will be your profit. For our example, you gained 15 USD from the deal—this is how arbitrage outside the crypto sphere works.
Arbitrage trading in the world of cryptocurrencies
In the context of cryptocurrency, arbitrage is among the most commonly used approaches, which also created a buzz in the market two years ago. Cryptocurrencies like bitcoin and thousands of others are known to be highly volatile digital assets, and the price of these digital currencies also varies from one market to another.
There was a time when the price of the most dominant cryptocurrency, BTC, was 43 percent lower in South Korea than it was in the United States of America. This unusual event, which happened on January 9, 2018, was commonly known as the “Kimchi Premium.” This led crypto holders and users to buy BTC in cryptocurrency exchanges in South Korea and sell in other crypto marketplaces at a higher price—making profits in an instant through bitcoin arbitrage.
How does it work?
If you are planning to try your hand at doing crypto arbitrage, there are a few important things to take note of before starting your journey. The first thing to consider is the fund or resources that you will be using for buying crypto assets. One good thing about this is that there is no minimum or maximum amount required for you to proceed with this approach.
Once you already have your resources set, the next important thing to have is a digital wallet where you will store your cryptocurrencies. Aside from using it as storage, digital wallets can also be used for sending funds and checking the account’s running balance.
If you are new to the business and don’t have a digital or bitcoin wallet yet, there are some crypto exchange platforms where you can get one for free. One of these platforms is Paxful, a leading peer-to-peer (P2P) marketplace for bitcoin trading, which entitles you to a free bitcoin wallet upon creating an account on the platform.
After securing funds for buying and having a digital wallet, you can now begin looking for good cryptocurrency exchanges to do arbitrage trading. There are over hundreds of crypto exchanges available worldwide, and it is crucial to choose those that are trustworthy and reliable. Among the things to check and look out for in a platform is if it is reputable and is compliant with the strict financial regulations concerning digital currencies.
Crypto arbitrage methods
There are three approaches to performing arbitrage trading in the cryptocurrency world—they are cross-border, spatial, and statistical. Let’s start with the spatial method. Briefly, this arbitrage type is earning profit from the discrepancy of the price of bitcoin or other cryptocurrencies offered in two different crypto marketplaces.
The cross-border approach is almost similar to the previous one, but the exchanges used for arbitrage trading are located in two different countries or jurisdictions. This is where the Kimchi Premium event is included. Some crypto traders find this difficult due to some crypto regulatory requirements such as “know your customer” (KYC) procedures and others.
Statistical arbitrage, on the other hand, involves mathematical and statistical models in analyzing opportunities in cryptocurrency arbitrage, such as patterns and differences in price. This method might sound overwhelming as it is quantitative and uses analytics in trading.
Advantages and drawbacks of crypto arbitrage trading
Engaging in arbitrage can be both exciting and overwhelming, most notably if you are new to the approach. However, it is also important to note that this profit-gaining method has its strengths and limitations.
When you get the hang of the process, earning profit from price differences can be easy. To help you become more familiar with it, there are available resources and tools where price analysis and predictions can be checked and examined. There are available charts to use in comparing bitcoin and other cryptocurrencies’ price alterations from time to time, on different exchange platforms.
On the flip side, it is also important to bear in mind that these digital assets are highly volatile, and the price can unpredictably and widely change in a very short time. Also, when buying, selling, or transferring funds on crypto platforms, there are some fees, such as ones for transfers, transactions, and wallet fees that can be charged for each deal. This process, while it is deemed less prone to risks, is considered tricky since trade scams and frauds are still prevalent.
So, if you are planning to make money with bitcoin through engaging in crypto arbitrage—just like in any new engagements—make sure to do your research so you can make the most of it and have the best profit-earning opportunities possible.
*The content of this article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.