What you need to know about cryptocurrency arbitrage?

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The difference in cryptocurrency quotes on different platforms allows the trader to receive additional income. This method of trading is called arbitrage, and its essence is to buy tokens in order to resell them at a higher price. RBC Crypto.

Arbitrage appeared on the stock and currency markets a long time ago. However, it is more difficult to trade according to this scheme on traditional exchanges, because the difference in quotes is very small. Cryptocurrency traders get more opportunities for this type of income due to significant fluctuations in the prices of exchanges for digital assets.

What is the difference?

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Exchange rate differences arise due to different liquidity of trading on exchanges, explained cryptanalyst and private trader Dmitry Fomin. According to him, there are many users on large platforms and trading is active, so quotes are always market-based. And on small exchanges, liquidity is low, so their rates may lag behind the market.

Another factor influencing arbitration, the expert called high commissions. Fomin explained that the more a transaction costs, the fewer arbitrageurs are willing to take on deals, and the more likely it is that exchange rate differences will form between large and small exchanges.

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The difference in quotes may be due to the fact that trading in BTC, for example, goes to different coins / currencies, Andrey Podolyan, CEO of the Cryptorg platform, believes. He gave an example that in one place it can be trades against USDT, and in another against regular fiat USD.

Also, the expert believes that the difference in quotes and prices may appear due to the fact that the input / output of the coin on the exchange is closed. He clarified that because of this, special conditions arise inside the exchange.

“Moreover, if the input / output on the exchange is closed for a long time, then the difference in prices can be very significant. For example, this happened quite recently with the LUNA coin,” Podolyan recalled.

The price of the asset is formed due to the balance of supply and demand, added Nikita Zuborev, senior analyst at Bestchange.ru. He pointed out that for cryptocurrencies there is no central organization that publishes the official exchange rate, as is the case in the world of finance for floating currencies.

“It is logical that different crypto exchanges will have different levels of supply and demand: as with the prices of products in two neighboring stores,” Zuborev drew an analogy.

The ability to make money on this difference greatly affects the supply and demand in a particular service, the expert believes. He noted that this balances prices in the market, so “arbitrageurs” are in some ways extremely useful for the entire industry.

What schemes do traders use

The most popular type of arbitrage is automatic inter-exchange, with the help of bots, Zuborev said. He explained that the robot independently analyzes hundreds of trading pairs on dozens of centralized and decentralized exchanges, transfers funds between exchanges and places buy and sell orders.

“Human participation in such operations is minimal, only initial setup and maintenance of updates,” added a senior analyst at Bestchange.ru.

Arbitrage is currently carried out in 99% of cases by automatic trading systems, agreed Andrey Podolyan, CEO of the Cryptorg platform.

According to him, such type of arbitration as a triangle is now widespread. It works within the framework of one exchange, the expert said. A coin is selected that trades in at least three pairs: the algorithm can buy ETH for USDT, then sell ETH for BTC, and finally sell BTC to USDT. Thus, at the end, the trader again has a balance in USDT.

In such a combination, it is enough to get a small% profit for the arbitration to be successful, says Podolyan. He explained that even 0.01% plus, taking into account the commission, already means that the bundle was successful. In his opinion, tens and hundreds of such circles can eventually give a good profit per day. This type of arbitrage is especially profitable on exchanges with low liquidity, where there are market deviations, the expert believes.

Arbitrage between the spot and futures markets is also popular now, adds Podolyan. He said that both perpetual contracts and contracts with a limited duration (quarterly, monthly, and so on) are involved in the work on futures.

“As a rule, such arbitrage is good on strong market movements. When news impulses arise. There are gaps between all the contracts that are being negotiated, ”said the specialist.

Trading risks

The biggest problem for arbitrage is freezing or delaying the withdrawal of funds, says Nikita Zuborev, senior analyst at Bestchange.ru. He explained that usually the discrepancy in rates is a momentary event that provokes a large number of people and robots to capitalize on it, so reaction time is very important. The longer the funds go from one exchange to another, the higher the probability of not being in time and eventually losing due to commissions or changes in the price of an asset.

Zuborev also noted that there are risks of hacking smart contracts if decentralized exchanges are used. The expert clarified that a dilemma arises here: whether to increase the number of exchanges under consideration at the expense of low-liquid young projects, which most often give rise to such discrepancies with centralized exchanges.

The expert warned that one should not exclude possible sanctions from centralized services for suspicious activity or in the existing realities and for political reasons.

The expert called a potential backdoor in a trading robot another not the most obvious risk. Zuborev emphasized that for the machines to work correctly, it is necessary to provide API keys, which in fact give them full access to your funds. And the developer, having the possibility of remote control, can use this for his own selfish purposes, the analyst warned.

The base risk is the loss incurred due to the fact that the price of the token fell during the transfer from exchange to exchange, according to cryptanalyst and private trader Dmitry Fomin. This may be due to limitations in the operation of the exchange, the freezing of a transaction in the blockchain, and other factors that affect the speed of the transaction.

The expert advises carefully checking the selected tokens and platforms, as well as carefully entering the transfer addresses and the selected network so as not to lose your funds due to haste.

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Source: Cryptocurrency

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