In the crypto market, all kinds of strategies are in play as traders try to influence a price and make a profit. Plain Arbitrage is one such strategy where market players seek out assets that are similar or identical to making profits on small discrepancies. Traders are always on the lookout for market inefficiencies, which create these discrepancies, that provide opportunities for profits.
Types of Arbitrage
1. Plain: Considered to be risk-free.
2. Risk: Considered to be speculative. Rather like gambling on a horse that might be expected to win a race. It’s a presumption that might not occur due to an unknown factor.
Plain Arbitrage Example
For an example, we can look at two exchanges, and we can analyze how one cryptocurrency performs in one market and how it also trades in the other market. Should a situation arise where one, becomes cheaper than the other, a trader will jump in and sell the more expensive one and purchase the cheaper one. The trader profits from the difference.
Unfortunately, taking advantage of plain arbitrage opportunities is not that easy. Big players have a back up from sophisticated systems that are programmed to spot these fluctuation opportunities and take appropriate action. But this action needs to be taken within a few seconds of an opportunity being spotted. Any delay will mean that the boat has been missed. This kind of play is for the professionals, and for the everyday man/woman on the street, it might be impossible to get a taste of this action.
This is where the man/woman on the street has more opportunities to get involved. Unfortunately, as the name suggests, the risks are far greater and you could end up losing a lot of money. If you were to buy a cryptocurrency that you have a feeling is going to start seeing an increase in value but it was to then lose value and struggle to ever find a rise again, then you have found yourself with a big loss. However, with greater risk comes greater reward, and if that cryptocurrency does then go big on your prediction, then you are going to reap the profits from that increase in value.
Other Types of Arbitrage Strategies Include:
Box Arbitrage: This is also referred to as "box conversion". This is where the spread is increased to a spread of 4 to try and make a profit.
Calendar Arbitrage: The idea behind this one is to take a benefit with unusually high near term options rather than extended options but it’s a game plan that requires actions being taken almost at the same time.
Dividend Arbitrage: This is a hedging strategy taking advantage of lower costs to achieve a greater risk-free dividend.
In an ideal world, the opportunities for plain arbitrage should be less and less as traders shouldn’t be provided with the opportunity to make a quick profit due to some kind of flaw, in the overall process flow, which allows the big companies to step up to the plate with their immensely sophisticated software. As technology advances, more and more ways to try and infiltrate the system will come into play. But the system needs to fight back and try to avoid easy pickings.