Arbitrage refers to the process of exploiting the price differential of some cryptocurrency between two markets; by simultaneously buying in the lower priced market and selling in the higher priced market. This thus allows the arber to make money in the process, and the profit is usually is in sync with the investments. The steps below help in better understanding the arbitrage process.
Steps in the Arbitrage Process
The following example helps in better understanding the arbitrage process.
1. An investor buys Bitcoin worth 50000 USD; say he gets 50 Bitcoin in his Bitcoin wallet.
2. He buys this via the exchange, say Kraken, using executium.com as the platform.
3. Now at the same time the price of Bitcoin at Bitmex is 1500 USD.
4. So he also places a sell order at Bitmex, for all the Bitcoin that he had purchased.
5. He uses executium.com as the platform again, so that he can make out the transactions quickly, as the prices may fluctuate again in some time.
6. The direct profit in this arbitrage process is (1500-1000) * 50 = 25000 USD minus the handling fee of executium.com and the two exchanges.
7. The investor can also place a limit order while both buying and selling, to minimize the risk of loss in the arbitrage process.
8. You transfer the proceeds back to Kraken, partially or fully.
Why Arbitrage is Safe?
Arbitrage is usually a safe method of dealing in cryptocurrency, because you can place limit orders on both buy and sell. Consider the same above example, and say you place a limit order for 1000 USD for buy and 1300 USD for sell. Now it won’t buy if the price goes above the 1000 USD mark, so means you have at least 50 Bitcoin in your wallet. And it won’t sell below 1300 USD mark, so it means you make at least 300 * 50 = 15000 USD as profit.
Obstacles in the Arbitrage Process
All said above, however, there are many obstacles in the arbitrage process, else every other Tom, Dick or Harry you meet, would have been a millionaire by now! First of all an arbitrage opportunity would not exist at all times, so you need to be alert and vigilant for the right time. Second, even if it exists, you have to factor in the cost associated with the two exchanges, the platform fee, the withdrawal fee, conversion fee etc. If the gap is big enough to cover these costs, only then must you go for arbitrage process. And it will be difficult for newbies to calculate this beforehand. Third, all these sub processes, like placing a buy order, then withdrawing and transferring to a different exchange and placing a sell order etc. takes time. And time in cryptocurrency arbitrage process means, perhaps, the price differential that you wanted to tap, no longer exists.
It is advisable to use some platform, like executium.com, for better playing with the arbitrage process. They have well formulated processes in place, which will hasten your arbitrage process, and will minimize the associated costs that exist. Also the services of such platforms can be taken in the form of signals and alerts, to alarm you whenever the opportunity for arbitrage process is ripe.