Arbitrage occurs when you buy low and sell high. But this seems to sound so easy, in theory. So what is simple arbitrage in cryptocurrency?. Below is a very helpful guide on what simple arbitrage is, what it does, how it works, how it is different from other variations of arbitrage and the types of people who would benefit from it.
Well, before we delve into what simple arbitrage is, it is only good to know what arbitrage means in its general terms as used in the crypto context. So, we all know that crypto currency is still in its infancy and its market is spread across the globe. With that in mind, we are also aware that at times, there can be price variations between coin exchanges. Whenever this situation arises, some crafty traders rush to cash in on this opportunity. That means they buy crypto coins where they are selling at low prices and then proceed to sell them where prices are higher, thereby raking in huge profits from the exchange.
Simple arbitrage is just one of the multiple strategies that arbitrage traders use to make profits. It involves buying and selling the same coins immediately but on separate exchanges. This is usually carried out simultaneously and is merely an arbitrage where a trader buys one asset on one exchange and then sells it on another exchange at almost the same time. If there is a mispricing in the price of the token, then the trader will make a profit the moment they sell the tokens on the other exchange.
For example, assuming that the price of Ripple XRP is being sold at 0.58 on Binance, and 0.56 on Bitstamp, an immediate opportunity for making a profit of 0.02 exists when you get the difference of the two.
How to do a Simple Arbitrage
The basic and most effective approach to carry out a simple arbitrage is by comparing the market exchanges manually. This can be done by monitoring token differences and then placing your transfer funds and trading accordingly. However, the availability of technological online bots has even made it easier for crafty traders to track market differences. These bots track token movements so that you are always updated on which coin price is dropping and which coin price is increasing. An example of such bots is Blockfolio, an application that has really simplified the market monitoring process.
Who can benefit from Simple Arbitrage in cryptocurrency?
Simple arbitrage is usually carried out by individual traders as well as entrepreneurial institutions. After all, the end product is a huge profit. From individuals to institutions, everyone has to become crafty in order to rake in huge benefits from cryptocurrency exchange markets.
How Simple Arbitrage differs from other variations of arbitrage
There exists a notable difference among the multiple arbitrage strategies. For simple arbitrage, a trader buys a token from an exchange and then sells it on another almost immediately. But for triangular arbitrage, the trader is able to cash in on the price differences between two or more currencies. That is for example, if they have bought a BTC in US Dollars, they sell it to make a EUR, and then proceeds to exchange the EURs back into dollars. The last approach is the convergence arbitrage, which involves buying a bitcoin on an exchange that it has been undervalued and then short selling the coin on another platform that is overvalued. You can then bag profits when the two prices converge, just as the name suggests.