Arbitrage has become one of the primary sources of revenue for a huge chunk of the global population today. Trading of all kinds is getting more prevalent, and arbitrage has become more like of synonymous to cryptocurrency. If you ask some crypto investor, on how he likes to multiply his money, the most probable answer is going to be one word- “Arbitrage”. Even if someone is investing in pair trading, or long term as well, some part of the portfolio is usually Arbitrage. While we talk so much about the benefits of cryptocurrency arbitrage, wouldn’t it be helpful if we investigate what are the pitfalls of arbitrage in cryptocurrency as well? Read below, so as not to, miss this important and useful aspect, that is, the downside of arbitrage.
What Are the Pitfalls of Arbitrage
When we do something, it is always better to weigh both the pros and the cons that are associated. While most of us often talk about the pros of arbitrage, let us examine a few pitfalls here.
1. Low Profits: As compared to the hard work and always vigilant attitude that one needs for cryptocurrency arbitrage, the profits are not very much in sync. Some other high risk investments can usually get a trader better profits in the same amount of time, with the same amount of investment.
2. Need of Expensive Bots and Algorithms: If we talk about cryptocurrency trading in particular, the market never sleeps and one would not like to miss that rare opportunity of a fat bellied transaction. So a mandate becomes to invest in high quality cryptocurrency trading bots and cryptocurrency trading algorithms, which signal you as soon as there some scope. This is one of the major downsides to when we analyze what are the pitfalls of arbitrage.
3. Large sums of money: Although it is not a mandate, but crypto arbitrage is usually profitable only if there is some considerable amount that you have invested in. This is because of the transaction fee and the operation fee and exchange rates, which are to be factored in while calculating the profits. So this can sometimes go beyond the scope of small investors.
4. Volatility: Cryptocurrency is a volatile world. Prices fluctuate within blinks of the eye. This makes it tougher for novice and amateurs, who have just ventured into crypto arbitrage, to speculate the market well, and make the transactions as quickly as the ideal. This in turn gives an advantage to the pro traders, thus lowering the profit making capability of new traders in cryptocurrency.
5. Tax: In most of the economies where crypto arbitrage is legal, it is given the status of hybrid funds, and so is taxed almost like equity funds. This makes it a bit downsided for traders who already are looking for tax evasion schemes and opting in for financial re-engineering.
6. Unpredictable: The last but not the least, is the unpredictability as a pitfall of arbitrage. This is one of the major reasons that most people quit the idea of cryptocurrency arbitrage as a primary source of income, when they sit to analyze what are the pitfalls of arbitrage. The returns are really not predictable beyond a point, no matter how good you are!