As we all know, the cryptocurrency industry has evolved a great deal over the last decade or so. One of the primary reasons behind that is the constant innovation of brand new concepts in this space. If we go back to the early days of crypto, it was intended to be used as a peer-to-peer payments mechanism so that people could stop relying on traditional financial organizations which served as intermediaries. However, over time, crypto has made its way into several other use cases, applications, and methods of use, one of the most prominent ones being cryptocurrency trading. Today, trading is one of the primary use cases of cryptocurrencies, and several platforms like crypto exchanges have made it considerably simple for anyone ranging from beginners and amateurs to professionals.
Moreover, cryptocurrency trading, in itself, has evolved over the years with the emergence of advanced trading tools and concepts. Moving forward, it is becoming fairly easy for people with minimal trading knowledge to start the process and eventually make their way into trading as a profession. One such concept is cryptocurrency arbitrage. In this blog post, we will have a detailed look into this concept and understand the fundamentals of crypto arbitrage.
What is Crypto Arbitrage?
Cryptocurrencies are not controlled by any centralized organization, as it is based on the pillars of decentralization and transparency. Hence, needless to mention the price of a certain cryptocurrency is determined by the supply-demand dynamics of the market. In that context, it is important to note that these dynamics will be different in different markets and the price of a certain token/cryptocurrency will vary from market to market or geography to geography. For example, the price of the ModiCoin token can be $X in India, $Y in Australia, and $Z in the United States of America, as each of these are separate markets altogether with varying supply-demand dynamics. So, the question is there any way for traders to leverage the varying prices in different markets? Here comes the concept of crypto arbitrage.
Crypto arbitrage enables the simultaneous buying and selling of cryptocurrencies. This concept leverages the price difference of the same crypto asset in different markets and passes on the profits (difference in price) to the traders or investors.
Let us understand this with an example. Consider the price of Bitcoin. It might be trading at $38000 in the US, and at the same time, it might be trading at $45000 in the Indian market. So, the price difference is $7000. A trader who understands crypto arbitrage and his/her crypto exchange offer this feature would be able to buy BTC from the US market and sell it off at a higher price in the Indian market depending on the current market scenario. While it is true that the entire process is not as seamless as mentioned here, this is the basic fundamental concept of crypto arbitrage.
Crypto Arbitrage: Key Points to Remember
It is important to consider that, while crypto arbitrage is an extremely lucrative concept that allows one to utilize the price difference between markets and convert that into profit, it is not a completely risk-free proposition. Just like any other aspect of the crypto industry, arbitrage also poses some amount of risk.
For example, there is a forex risk associated with this concept, as the transferring of funds in the global market through overseas wallets often takes a couple of hours. And this time lag might just be enough for the exchange rate in the desired market to dip and thus derail one’s profit-making ambitions.
Furthermore, traders often choose to hold on to their assets with the hope that the asset price will appreciate in some other market. Holding on for too long might as well reduce one’s actual profit-making opportunities, as we all know that the crypto market is highly volatile.
These are some of the risks associated with the concept of crypto arbitrage. However, it is fair to say that arbitrage has a very reasonable risk-reward rating, and one must study crypto markets thoroughly to reap maximum benefit out of this.
This blog post is solely for educational purposes and must not be considered as investment advice. We suggest you conduct your research and due diligence before investing in any crypto asset through any trading mechanism.