Learning to make money is a great skill but learning to make that money generate more money for you is far greater. Cryptocurrency, over the years, has been seen as just a passing trend, especially by those of the view that it cannot compete with fiat currencies, which has long been in existence. However, cryptocurrencies have gained more popularity all over the world, even in Zimbabwe— an African country plagued with a completely devalued fiat currency.
This popularity has drawn attention to sharp investors who are beginning to see profitable investment opportunities in cryptocurrency. However it still remains a very risky investment venture considering the volatility of the cryptocurrency market. As with any other types of investments outside of cryptocurrency, risks are unavoidable. It’s just the degrees of risks that differs.
If you are a cryptocurrency enthusiast, looking to start profiting from cryptocurrency, the word arbitrage must have flashed in your face at least a couple of times, while researching on ways to make profits with cryptocurrency. Even if it hasn’t, and this is your first time coming across this term, presented here is a beginner’s guide to the world of crypto trading arbitrage. Hopefully you can make sense of it, and then implement it if you think you’re confident enough to go down this highly risky, yet profitable, investment route.
What is crypto trading arbitrage?
Arbitrage is a common term used in the finance world, which means the art of buying and selling of any kind of asset almost immediately or simultaneously with the aim of profiting through such sales within a very short period of time.
With the increasing public interest in investing in cryptocurrencies, and many more cryptocurrency investors invading the crypto world earlier, it wasn’t long before this same investment trend crept into the cryptocurrency market. Crypto trading arbitrage is simply buying a cryptocurrency on an exchange at a cheaper price and selling it, either on the same exchange platform or on another exchange platform, with the aim of making profit from it.
With over two hundred and forty cryptocurrency exchanges, it is barely impossible to have all of them selling cryptocurrencies at the same price. There will always be a prices difference, which smart arbitrage traders are hunting for. Even though crypto trading arbitrage looks simple and easy to do, in reality, it comes with a lot of risk. Also it could eat very deep into your profits if you do not have the required analytical skills, experience and strategy to make the right moves.
How does it work?
The big players in cryptocurrency trading are usually the whales and hedge funds. Whales are those who have been able to acquire a large amount of cryptocurrency for themselves, worth over millions. They were early adopters of cryptocurrency who benefited greatly during the boom period of cryptocurrency before prices fell. They have both the resources and experience required to be able to carry out a crypto trading arbitrage, making even larger profits from it because of the pool of funds available to them.
The hedge funds on the other hand is a single entity that pulls funds from a pool of investors, carries out the trade on their behalf and then share profits created with all investors involved. This is usually carried out by hedge fund managers who are very experienced, having both the high level of analytical skills required to make better and profitable trading decisions. They also have the strategies needed to make such bold risky moves.
For smaller investors, who are neither in the category or the whales or even having the minimum funds required for hedge funds, they can still participate in this crypto trading arbitrage and make some reasonable profit off it. However, with lesser funds, this highly risky trading strategy could both wipe out their profits and even generate trading losses if the cryptocurrency market gets too volatile during their trading period.
How to perform it
Having calculated the risks involved in this kind of profitable trading strategy, the next thing is to find an arbitrage opportunity in any of the exchanges by looking for price variations. These variations can be between exchanges or within an exchange. Once you’ve done that you can go ahead to trade.
For trading between exchanges, you need to have an account on both exchanges. If you don’t, then register to do so. After which you can go ahead to make a deposit of your preferred amount of fiat currency on one of the platforms (the cheaper one obviously), and buy the your preferred cryptocurrency. Transfer the cryptocurrency to the second exchange and sell it for fiat currency, then withdraw your profit.
If you’re trading within an exchange on the other hand, you will have to deposit your preferred amount of fiat currency in your preferred exchange. Buy your first cryptocurrency and then sell. Buy a second cryptocurrency and then sell it again. Buy another cryptocurrency on the same exchange and sell it. You could repeat this as many times as you want, until you’re satisfied but don’t over do it (remember that the cryptocurrency market could suddenly become volatile while you’re carry out these moves). The last cryptocurrency you sell, exchange it for fiat currency and withdraw your profit. You can take the fiat currency (your profit) again and repeat the same process again (as many times until you are satisfied with the profit you have made before the market goes volatile again).
As with any kind of risky investment, you can lose from this trading even if you have the best strategy. Having analytically mapped out the best moves to make the most profit, the unpredictability of the cryptocurrency market could still cripple the entire trade, causing you to lose both your profits and initial investment.