Arbitrage trading can be defined as a strategy through which price differentials of the same asset in the different exchanges are exploited. The biggest opportunities appear in those markets where price differentials are caused by various reasons such as differing liquidity and market dynamics as in cryptocurrency, thus lowering the risk of arbitrage trading for traders.
The basic idea is very simple: buy a cryptocurrency at a lower price on one exchange and sell it on another at a higher price. For example, buying Bitcoin from Exchange A at $30,000 can be sold on Exchange B at $30,100. In this case, an arbitrageur would make a difference of $100 (minus transaction fees).
Spatial arbitrage: This refers to taking advantage of price differences between exchanges located in different places or areas.
Triangular Arbitrage: This involves trading in three currencies in the same exchange to take advantage of unrealistic pricing relative to each other.
Statistical Arbitrage: It involves the use of quantitative models to identify and take advantage of short-term mispricing.
Predictable returns with arbitrage trading carry lower risks than other strategies, but there are drawbacks like transaction fees incurred and limits to withdrawal in some exchanges, as well as the suddenness required in making trades before equality in price happens.
In the fast and furious environment of cryptocurrency, arbitrage still remains one of the best options for traders to realize profits running from the increased value differences between platforms.
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