As far as crypto trading is concerned, having a reliable strategy when entering the trading floor is a crucial requirement. You must ensure that you take advantage of the market swings and realize gains whenever possible.
Crypto arbitrage is perhaps the most straightforward and least risky strategy you can use to safeguard your portfolio. It entails buying crypto while the prices are low from one exchange and immediately selling them in another to collect profit from the trade.
However, the cryptocurrency market is highly volatile and has unpredictable price fluctuations. For that reason, crypto arbitrage bot have become a must-have tool for traders using this strategy.
Moving the cryptos from one exchange to another might take longer due to time zone differences or liquidity in the market, resulting in missed opportunities. So, learn how crypto arbitrage works before applying it in your trading business.
Here are six trading strategies for crypto arbitrage success:
- Cross-exchange Arbitrage
Cross-exchange arbitrage is straightforward because you’re buying low-priced cryptos from one exchange and selling them higher in another. Arbitragers using this approach when trading cryptos must understand the concept of time attached to cross-exchange strategy. Thus, you’ll have to move fast to keep up with the small trading window.
If you buy cryptos and instantly sell them, the chances of making profits in seconds are high because of the market price action. Hence, ensure that you identify with exchanges in different time zones to pivot your trades for success.
- Triangular Arbitrage
Triangular arbitrage entails pumping funds into digital currencies to leverage the market price gaps within an exchange. Using this strategy requires substantial capital and an understanding of the crypto assets in the market.
Savvy traders create a trading loop to support this strategy by identifying high-performing cryptos and adding them to the list.
For instance, you can have three digital currencies aligned in your trading loops such as Bitcoin (BTC), Ethereum (ETHER), and Litecoin (LTC). When looking for opportunities to capitalize on market inefficiencies, your next step can follow a simple sequence of trading BTC for ETHER, ETHER for LTC, and lastly, LTC back to BTC. If the market inefficiencies are more considerable between the cryptos, the expected returns will be more because you’ll have significant funds to buy the crypto while the prices are low.
- Decentralized Arbitrage
Decentralized arbitrage focuses on decentralized exchanges where traders use automated programs such as Bitsgap or smart contracts to spot prices of crypto trading pairs. Traders using this strategy deploy bots to look for trading opportunities in centralized exchanges that match predetermined conditions and instructions.
Consequently, the arbitrage traders will move fast to take cross-exchange trades looking at price gaps on decentralized and centralized exchanges separately.
- Spatial Arbitrage
Spatial arbitrage has the same characteristics as cross-exchange arbitrage. Arbitragers can profit from using this strategy because there are supply and demand inefficiencies in the crypto market. Exchanges that operate in different time zones and regions have significant discrepancies that can have great returns if you trade efficiently.
In addition, spatial arbitrage might be the most straightforward strategy to apply when trading cryptos. Still, you must be aware of the transfer costs and time that can affect the profitability of your trades.
- Spatial Arbitrage Without Transfer
Spatial arbitrage without transfer offers an alternative for traders to avoid paying transfer costs and missing opportunities to capitalize on market inefficiencies. Arbitragers have tactfully refined this strategy by going long on crypto in one exchange platform and short on the same type of crypto in another exchange.
The primary goal of such actions is to capitalize on the price convergence of two different platforms. You’ll have to wait until the crypto asset prices converge to collect profits; otherwise, the trades might go into losses.
Moreover, by not moving or transferring cryptos from one exchange to another, you’ll only pay trading fees in the respective exchanges.
- Statistical Arbitrage
Statistical arbitrage relies heavily on bots with mathematical models to qualify trade executions. The underlying trading plan is complex and might need some analytical approach beforehand.
Traders using this strategy must learn computation techniques to support their crypto transactions. Besides, the trading bots take significant trading positions in the hyper-volatile market to close with profits. So, you must translate the econometrics as presented by the bots for you to trade at scale.
Final Thoughts
Having a trading strategy is an essential requirement for your success in the crypto trading business. Using arbitrage is less risky and can be profitable if well planned and executed. However, you must ensure that your crypto asset transfer is fast because the market volatility causes price changes in seconds. Furthermore, you must be tactful when deploying the underlying strategy to avoid costs between exchanges and collect more returns on your trades.
