In the world of trading, it is common to have the same commodity trading at different prices on different exchanges. Arbitrage is a trading strategy that allows traders to take advantage of these price differences. For instance, supposing the Bitcoin price on one exchange is $6,000 while another exchange is selling Bitcoin for $5,500, a trader can buy on the cheaper exchange and sell on the one with a higher price thereby making a profit of $500 on every bitcoin traded.
Arbitrage can be a risky affair, especially in cryptocurrency due to the high volatility of the cryptocurrency market. For you to be successful, you need to be very keen and good at reading price fluctuations in order to make informed decisions. All you will be looking for is large price differences because the larger the price fluctuations, the greater the profit margins. Obviously, you need to factor in the trading fees when calculating your expected profits on a trade. For instance, if you make a profit of $100 and yet you spent $150 on fees, then you will have made a loss.
The biggest challenge for most traders wishing to execute arbitrage strategies is the transfer of fiat from their bank onto the exchange and then the transfer of cryptocurrency across the various exchanges. Having some float in the different exchanges is the most practical way of dealing with this challenge because you want to take advantage of any price spike as soon as you notice it.
Common strategies used
Executium is the best tool for implementing arbitrage trading strategies across various exchanges. There are two main strategies that are typically employed by traders using the Executium tool - plain and risk arbitrage. Plain arbitrage is where one studies the price movements on two exchanges and executes a buy or sell as soon as the price drastically fluctuates on one exchange. Plain arbitrage is quite risky because if you do not execute your trade immediately, you will miss out on the chance to profit. The speed at which the transactions need to be executed makes it impossible for someone to do it manually and that is why pro traders rely on executium for all plain arbitrage executions.
Risk arbitrage is easier than plain arbitrage and offers lots of opportunities for almost anyone to try. However, just like the name suggests, it is quite a risky way of trading. This strategy involves holding the digital assets in anticipation of a rise in price. The risk in this is if the prices continue spiraling downwards, you end up losing lots of money. But with great risk also comes great rewards because when the prices go through the roof, you will smile all the way to the bank.
In an ideal trading ecosystem, opportunities for plain arbitrage should be very scarce because traders wouldn’t be encouraged to make a quick buck due to some flaw in the system. But the cryptocurrency ecosystem is anything but ideal – there are too many forces that influence price movement and that is why opportunities to execute arbitrage strategies will always be in plenty.