A Rich Man’s Game: Crypto Arbitrage Trading
Arbitrage is the simultaneous buying and selling of an asset on different markets to profit from the price difference between those markets. In a highly simplified example of how cryptocurrency arbitrage works, you would search for a specific coin that’s cheaper on Exchange A than on Exchange B. You then buy the coin on Exchange A, sell it for a higher price on Exchange B, and pocket the difference.
For example, if the price of a security asset is trading at USD 2000 on exchange A and USD 2530 on exchange B, a trader can buy the asset for USD 2000 on exchange B and sell it for USD 2530 on exchange A at the same time to generate a largely risk-free profit of USD 530. That is how arbitrage trading works.
Who are the main cryptocurrency arbitragers?
Due to the large amount of capital required to profit from arbitrage trading opportunities, the two main players in the crypto asset arbitrage space are so-called “whales” and hedge funds.
Whales – early adopters of cryptocurrencies who now have millions in cryptocurrencies can place big enough trades so that it makes sense to profit from a USD 600 price differential in bitcoin. They know how to navigate exchanges and have experience in locating the necessary liquidity to successfully execute an arbitrage trading strategy in these markets.
The same goes for digital currency-focused funds. Crypto hedge funds have the capital and the resources to successfully deploy an arbitrage strategy and several of the over 225 specialized funds in this field utilize this approach as part of their investment strategy.
Interestingly, in January 2018, Singapore-based hedge fund Kit Trading, a unit of Vulpes Investment Management, announced that it has raised USD 10 million for a new bitcoin arbitrage fund that will specifically seek to exploit cryptocurrency price differentials across various exchanges.
Everyday there are thousands of markets, trading billions of dollars in the cryptocurrency sector. There are always price differences between trading exchanges and profiting from those trades is called arbitrage trading. New exchanges and markets arrive constantly, making arbitrage opportunities more and more common.
The concept of arbitrage trading is not a new one and has existed in stock, bond and foreign exchange markets for many years. However, the development of quantitative systems designed to spot price differences and execute trades across separate markets has put arbitrage trading out of reach of most retail traders.
In order to maximize on the profits of manual cryptocurrency arbitrage, a person must have deep understanding of the market and monitor hundreds of arbitrage trade opportunities while having a method to quickly act upon the arbitrage opportunities when they are presented, without making any errors.SSRN-id3171204
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