Every day millions of dollars worth of cryptocurrencies are exchanged globally. But unlike traditional stock trading, there are multiple crypto exchanges where the price varies between each exchange.
Arbitrage is one of the trading strategies in which an asset is bought in one market and sold quickly in another market at a higher price, utilizing the price variation to turn into a profit.
Arbitrage strategies in crypto trading are primarily employed by short-term day traders and professional investors who are aiming to make short-term profits. But this may also be implemented over longer periods.
The main challenge that is faced by the arbitrage trader is, to find price hikes across multiple exchanges within seconds and also trading them quickly. For this purpose, the professional traders employ crypto trading bots to complete the deal instantly across exchanges. On top of that, arbitrage trades are low-risk, So the returns are usually low. That means the traders need to act instantly, but they also need a lot of capital to make it deserving.
Now, you might be wondering what are the types that are available in crypto trading. Here are the various types of arbitrage trading so let’s get right into it.
Exchange arbitrage:
The common type of arbitrage trading is exchange arbitrage, which is when a crypto trader buys one asset in an exchange and sells in another exchange.
The price of cryptocurrencies may change often. If you look at the order book for an asset in a different exchange, you will find that the asset prices are never the same at the exact time.
This is where arbitrage traders come into play. They try to expose small differences for users to reap profits. This eventually makes the underlying market to be more efficient as it stays in a comparatively contained range on different trading platforms.
Funding rate arbitrage:
Another type of arbitrage trading is funding rate arbitrage. This acts when a trader buys crypto and hedges its price change with a future agreement in the same crypto. If the cryptocurreny’s price declines at the market, then the purchase price is hedged. Here the cost means any fees that the position may incur.
Triangular arbitrage:
Triangular arbitrage acts when a trader notices a price difference between three different cryptocurrencies and exchanges them for one another in a kind of loop.
The idea behind this arbitrage comes from trying to take the aid of a cross-currency price difference.
Closing thoughts:
These advantages of arbitrage trading would be a great opportunity for all professional traders. With the appropriate amount of speed and capital, you can participate in these types of strategies and find low-risk, profitable trades in a short span of time.