Merger arbitrage is a hedge fund strategy also referred to as risk arbitrage. It is the act of purchasing and selling stock of two merging companies to create “riskless” profits. Merging arbitrage calculates the probability of the merger closing on time or at all. As the stock market price provides uncertainty, companies typically sell bellow the acquisition price. This is a method used to trade cryptocurrency.
What is cryptocurrency?
Cryptocurrency is the modern currency of the 21st century! It’s a digital or virtual currency designed to work as a medium of exchange, and as such is used in merger arbitrage. An example of this is Bitcoin, which was introduced to the world in 2009 by a programmer known to as Satoshi Nakamoto.
A cryptocurrency network is based on consensus of those involved regarding legitimacy of balances and transactions. This is necessary as it is an unregulated currency. It uses decentralized control as opposed to digital currency and central banking systems.
How does Cryptocurrency Arbitrage work?
Cryptocurrency is often traded in merging arbitrage. Cryptocurrency arbitrage allows you to take advantage of significant price differences between exchanges.
For example, buying a crypto on one exchange where the price is low and then immediately selling it on another exchange when the price is high. This happens when there is a rapid surge in in trading volume and inefficiencies between enhances which causes the price differences to appear.
This concept of merger arbitrage is not a new one, and has existed in stock, bond and foreign exchange markets for a great deal of time.
Merging Arbitrage is made possible because of the difference in trading volumes between two markets. But why is this? Well, where there is reasonable liquidity of a particular coin, prices are generally cheaper. When there is a limited amount of coins, the prices are generally higher. Arbitrage works when you buy a cheaper coin in one market, and sell it in another where they are scarce and valued at a higher price. Having said this, cryptocurrency also happens in the opposite direction.
What does it do?
Cryptocurrency merger arbitrage has surged in popularity in recent times. This means that there has been an increase in trading coin volumes around the globe. As the world exchanges are not linked, a low trading volume in one market can mean that the price isn’t adjusted to the exchange average immediately. This gives rise to exploitation in the marketplace.
What are the benefits?
Using cryptocurrencies like bitcoin offer a wide range of benefits . There are lower transaction fees than with credit cards and bank charges.
It is a less fraudulent method of payment. A transaction made with cryptocurrencies cannot be reversed using chargebacks or the like, which is a common method by fraudsters. It also offers instant payments, credit cards can take days or weeks to come through.
From a business point of view, there are no international barriers and restrictions due to trade. Adopting cryptocurrencies is a way to get ahead of your competition. It will give you an advantage to enter into the market earlier than those around you. It’s becoming widely embraced by the business world.