Crypto Arbitrage Fund
Since cryptocurrency has been breaking the bank recently, many traditional means of trading concepts are also moving into a comparatively new crypto financial section. Crypto arbitrage fund is an investment strategy that is easy to adopt and does not require a high level of expertise; hence it is gaining popularity.
Key Takeaways
- Arbitrage is taking advantage of the price difference of a cryptocurrency by purchasing it from one crypto exchange (at a lower price) and simultaneously selling to another (at a higher price).
- Crypto arbitrage is a low-risk trading strategy.
- Investors intending to make small but swift returns can adopt a crypto arbitrage strategy.
Arbitrage is a strategy where investors purchase a cryptocurrency from one exchange and then immediately sell it to another crypto exchange at a higher price.
Since hundreds of different crypto exchanges operate in the market, thus prices on each one are slightly different, and this is where arbitrage funds come into play. As the strategy is simple and carries low-risk, many users are adopting it to make quick money.
However, crypto arbitrage fund has potential risks as well. Here’s a closer look at how arbitrage funds work and the trading strategies most suit them.
Price Differences Across Crypto Exchanges
Since arbitrage is taking advantage of differences in prices of the same cryptocurrency across different crypto exchanges, thus users may wonder why there are price differences. The simple answer to this query is that since the crypto market is not regulated and cryptocurrencies are decentralized, there isn’t any central authority regulating prices.
Therefore, crypto prices bounded to vary from exchange to exchange. Likewise, some crypto exchanges have higher trading volumes; thus, demand and supply on such platforms differ vastly from smaller crypto brokers, thus affecting the prices of tokens.
Moreover, crypto trade commission fees also have a role to play in determining the final price of an underlying crypto coin.
Types of Arbitrage Funds
There are four main types of crypto arbitrage funds; let us discuss each.
- Inter-Exchange Arbitrage
If you buy from one exchange and sell it to another, it is known as the inter-exchange arbitrage, which involves only two crypto brokers.
This type of arbitrage seems impractical since you must pay high commission fees for the same purchase and sale. The better strategy in arbitrage is to hold assets on both exchanges.
For instance, you have $10,000 worth of USDT on the Binance exchange and 1 BTC on Kraken. If Bitcoin is worth 10,300 on Kraken and $10,000 on Binance, you can take advantage of such price difference by buying Bitcoin from Binance with USDTs while selling Bitcoin on Kraken at $20,300.
Thus, you take home $300 of profit by adopting an inter-exchange arbitrage strategy.
- Triangular Arbitrage
Although this crypto arbitrage type is straightforward as it is on the same exchange, it involves three different cryptocurrencies.
For example, you have Bitcoin, Solana, and Ethereum. Now imagine a situation where Ethereum’s price is low, so sell Bitcoin to buy Solana, then you buy Ethereum using Solana. Finally, you repurchase Bitcoin by using Ethereum.
By applying triangular arbitrage, you will have more Bitcoin than you first purchased with Solana, and that too without paying commission or gas fees since you are trading on the same platform.
- Spatial Arbitrage
If you take advantage of the price of an underlying digital asset based on different geographical locations, the method is called spatial arbitrage.
The prices may vary depending on the demand for a particular cryptocurrency in those parts of the world. Hence, you can make easy profits just by exploring different geographical markets.
- Statistical Arbitrage
Using automated bots to make arbitrage traders by applying statistical models is known as statistical arbitrage. You can program your bot to arbitrage across hundreds of exchanges by matching prices and finalizing trade.
Since bots are automated, hence they can make hundreds of transactions at the same time.
Pros and Cons of Crypto Arbitrage
Crypto arbitrage funds have their advantages and disadvantages and are listed below.
Pros
- Fewer fees
- Low-risk
- Quick returns
- Requires limited knowledge
- Automated
- Easily adaptable during low and high volatility
Cons
- It may require crypto assets across multiple exchanges
- High volatility may lead to bad inter-exchange arbitrage
Ways To Find A Crypto Arbitrage
Although it may appear a straightforward task, finding the right arbitrage is a daunting task. Here are a few methods through which you see the arbitrage option.
- Less Popular Cryptocurrencies
Traders can find better arbitrage options in less popular, less frequently traded cryptocurrencies since price fluctuations are generally high for such cryptos. Less popularity makes these coins more prone to rapid price fluctuations.
- New Software
Since there are hundreds of digital assets, investors use a software application to compare and select a crypto arbitrage.
Frequently Asked Questions
Is crypto arbitrage a good trading strategy?
Since the crypto market is highly volatile, arbitrage offers less risk with small and quick returns. So, it depends on the investor’s wishes, making arbitrage a good or bad decision.
How do crypto arbitrage fund works?
Arbitrage is taking advantage of the price difference between the same cryptocurrency of two different crypto exchanges.
Are crypto arbitrage risk-free?
No, crypto arbitrages are not risk-free as high volatility can make prices rapidly change, thus putting investors in an environment where they might make losses.
Parting Thoughts
Crypto arbitrage fund is gaining popularity at it carries less risk and swiftreturns. Since cryptocurrency prices are prone to change rapidly, investors can take advantage of them by buying them from an exchange at a low cost and selling to one buying at a high price.
Moreover, it is a simple strategy and does not require advance knowledge; hence newbies attracted to crypto arbitrage. Likewise, the plan is less risky but not totally risk-free.
However, arbitrage is complex, just like any other cryptocurrency trading option, but the practice is legal and carries a potential high yield.
Furthermore, studying the market and doing extensive homework before adopting crypto arbitrage is essential. Similarly, choose lesser-known cryptocurrencies and a software application that help make quick price comparisons and run arbitrage strategy.
We hope you are now fully versed with crypto arbitrage funds and are in a position to start executing this strategy. Please leave feedback!