What Is Arbitrage In Crypto?
Understanding Arbitrage in Crypto
According to the KBBI, arbitrage is the simultaneous buying and selling of the same goods in two or more markets with the hope of making a profit from the difference in price. Arbitrage in crypto is used as one of the strategies for traders to get profit by taking opportunities from the price differences that arise between markets. An example is when you buy a crypto asset that is low in price in market A, then sell it at the same time in market B when the price there is high.
Traders who trade in this way are called arbitrageurs. Usually, they have assets on several accounts on several different exchanges. So when they want to arbitrate, they don’t need to send crypto assets between exchanges because it will take time. Although this method seems simple and easy, in fact, arbitration has big challenges. This is because there are rarely opportunities for price differences between markets and traders must execute quickly and precisely.
Types of Crypto Arbitrage
For those of you who want to use arbitrage in trading, you need to understand the types of arbitrage opportunities below:
1. Retail arbitration
This type of arbitration occurs for retail products. It’s the same with buying products on a large scale.
2. Statistical arbitrage
This strategy requires implementing quantitative data models and bots to take advantage of arbitrage opportunities at scale. the process runs automatically, so traders can execute hundreds of trades in minutes to increase profits.
3. Risk arbitration
This type relies on mergers and acquisitions and is usually applied to hedge funds (hedge funds) where traders will trade briefly.
4. Negative arbitration
This arbitration results in missed opportunities due to the high-interest rate paid by the borrower on the obligation compared to the interest rate on the fund’s investment.
However, there are two types of arbitrage that are specifically used for crypto trading, namely:
1. Exchange arbitrage
Prices on various exchanges are not always the same at the same time (simultaneously) therefore the price of crypto assets can change quickly. This condition is used by arbitrageurs to buy the same asset on an exchange and then sell it on another exchange.
Suppose you are an arbitrageur who sees the price of BTC on exchange A is Rp. 150,000,000, and at the same time the price of BTC on exchange B is Rp. 153,000,000. Then you buy 1 BTC on exchange A and sell 1 BTC on exchange B. Then you will get a profit of IDR 3,000,000 before the transaction fee.
2. Triangular arbitrage
This arbitrage takes advantage of price differences across currencies, where the arbitrageur finds the price difference between three crypto assets and trades them for each other in a triangle.
Suppose you have BTC, then you use it to buy ETH. Then the ETH is used to buy BNB and sell it to get more BTC from the initial capital owned.
After reading the explanation above, are you interested in applying this method in trading? But keep in mind, even though there are those who call arbitrage low risk, it still has to be done carefully because of price imbalances that usually occur only in a short time. You also need to take into account the transaction fees charged by each exchange to calculate profit/loss when arbitrating.