Spread in cryptocurrency refers to the difference between the two prices, rates or yields. Now this difference can be between the bid price and the ask price, the buy price and the sell price etc. Traders, exploit this spread to make money. Cryptocurrency traders use the spread in terms of difference in the trading position usually, that is, the variation between a short position (selling) in one currency and the long position (buying) in another currency. Due to its prevalence and popularity, this is commonly known as spread trade/relative value trade and you can make money from the spread very easily.
Steps to Make Money from the Spread
Spreads are priced as units/pairs to facilitate simultaneous buying and selling two cryptocurrencies. These two currencies are called the legs of the spread. The overall net trade is of some positive profit value, so that the investor can make money from the spread. Money can be made both when the spread widens and when it narrows down.
Spread Betting, which is legal in U.K., is one way of making money out of the spread.
1. The trader speculates the price of the Bitcoin to go up or down.
2. A derivative contract is used to make the spread bet accordingly; actually the Bitcoin is neither purchased nor sold.
3. If the trader reflects that the price would increase, a long position in the spread bet is opened up.
4. If the trader reflects that the price would go down, a shot position in the spread bet must be opened up.
5. For every point movement of Bitcoin, the trader makes or loses money this way.
6. Only very small value of the trade has to be deposited.
Arbitrage trading is another form of technique to make money out of the spread.
1. Buy from an exchange that offers a lower price for the cryptocurrency.
2. Sell at an exchange that offers a higher price for the same cryptocurrency.
3. You make profit for some time, until the later exchange also comes to the same rate because of the currency influx.
4. This gap/spread takes some time to close, and the trader can make risk free profits in the meantime if the transactions are fast.
An example to understand how to make money from the spread
Say for example the spread is 50 USD. You can buy 2 USD above the ask price (so that you are fulfilled immediately) and can then sell 2 USD below the bid price (so that you can again sell immediately). You are still able to make a profit of 46 USD from the single trade. Or more accurately, try to place your limit order in front of all other orders in the current order book. Also need to be factored in, is the associated exchange fee where you trade.
There are softwares available in the market that let you track the spread and signal when the best time to make money from the spread is. Private online companies are also doing this, for example executium.com and their speculations and guidelines are more accurate than the automated bots.