The Crypto market is volatile, no one can accurately predict what will happen next. The same thing happens in crypto trading: the price of assets keeps changing. Read more to know more about bitcoin trading. Making good profits seems a little difficult. To combat all these traders identified the asymmetry in the market which ultimately makes profits to the trades.
This process of making money from the difference in the price of tokens on different exchanges is termed crypto arbitrage. This method is quite popular among traders who want to count every penny. That means if you want to make high profits in crypto trading. You must understand and use Crypto arbitrage. In crypto arbitrage, there are different strategies and types available which work differently and follow different paths to make you high profits. So, to decide which type of crypto arbitrage or strategy you want to experiment with. You need to understand and have a basic knowledge of these different types of crypto arbitrages.
Before getting directly into the types of crypto arbitrages, let’s get to know a bit about the concept of Crypto arbitrages, how they work and why we see differences in the prices of tokens on different exchanges.
How Crypto arbitrage makes money for traders?
There are hundreds of exchanges available out there on which varieties of tokens are listed. So, sometimes the price of the same token is different on different exchanges. Traders buy that token at a low price from one exchange and sell that particular token on different exchanges at a high price and the difference is considered as their profits. So, here a question arises, why is the price of the same token different on different exchanges?
The process for pricing the asset is different on both of the exchanges; centralized and decentralized. For centralized exchange, the price of the asset for the mean is the recent bid by any trader. Meaning any particular trader buys any token in “x” amount the “x” amount would be the price of that token at that time. Now, we can imagine how this process makes the price volatile. Traders can set the pricing following their trading needs.
In the case of a decentralized exchange, pricing is decided by an ” automated market marker system” which means the trade aligns the prices to create an opportunity for crypto arbitrage. Now, as we know there are hundreds of exchanges available on each of these pricing systems. This creates a gap in the price of the token. This creates an opportunity for crypto arbitrage and traders to make profits.
Different types of crypto arbitrages
There are several crypto arbitrages available to gain high profits. Some of the most popular strategies are as follows:
- Cross-exchange arbitrage: This is one of the most basic strategies of crypto arbitrage where a trader buys a token at a low price from one exchange and sells that token on a different exchange at a high price. This difference in the amount on both the exchanges is considered as the profit of that trader.
- Spatial arbitrage: Every country and region has a difference in the needs and flow of cryptocurrency. This difference is also an opportunity for crypto arbitrage. In this strategy, a trader buys any token from an exchange of different regions and then sells that token on an exchange of any other region where the price of the token is high. This difference is the source of the profit for that trader.
- Triangular arbitrage: In this crypto arbitrage strategy, the trade does not change the exchange but creates a triangle by trading in three different tokens on the same exchange. So, the trader converts their “A” token into “B” then “B” into “C” and again converts “C” into “A” increasing the number of “A” from the initial amount. This process creates three crypto trading pairs and ultimately increases the amount of the token used initially. This increase in the number of tokens is considered as the profit of the trader.
- Decentralized arbitrage: This strategy is common on decentralized exchanges where traders discover the difference in the price of tokens on decentralized and any centralized exchange and then buy and sell the token by using Cross- exchange method.
These are some of the widely used crypto arbitrage strategies globally to gain profits in crypto trading. Anyone can use these strategies based on their preferences.