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There are several strategies for trading cryptocurrencies. The most popular ones are those used for trading on the crypto market, such as day traders. Other strategies don't require the high level of expertise that day trading does.

Crypto arbitrage trading is one of these strategies that doesn't require such a high level of trading knowledge. However, it's not "easy" and requires some knowledge about crypto markets. So how does crypto arbitrage trading work?

What Is Crypto Arbitrage Trading?

You might have noticed that the price of Bitcoin is different on each exchange if you visited two or more at the same time. Instead, one exchange's price is either higher or lower than the other.

Every market, whether it be for stocks, commodities, or metals, exhibits this phenomenon. It is also present in the cryptocurrency market, which is why crypto arbitrage trading has emerged.

A cryptocurrency trading strategy known as crypto arbitrage trading entails buying and selling cryptoassets while profiting from the price discrepancy between them on competing exchanges.

Arbitrage is a strategy that anyone who's able to buy and sell cryptocurrencies on exchanges can use to make a profit. It's also a low-risk trade that requires little to no trading experience.

How Does Crypto Arbitrage Trading Work?

Arbitrage trading is about buying and selling cryptocurrencies from one exchange to another. Basically, you buy bitcoin on exchange A, where the price is lower, and sell it on exchange B, where the price is slightly higher.

To get a better picture of what we're saying, visit CoinMarketCap and select Bitcoin to see the price differences on different exchanges.

At the time of writing, the price of Bitcoin on Binance is $20,141, while on Huobi Exchange Global it's $20,130. So if you buy on Huobi Global and sell on Binance, you make a profit of about $11 on each Bitcoin.

Note, however, that the cryptocurrency market is very volatile and trades must be made very quickly, almost simultaneously, before prices change again. This isn't a problem with some arbitrage trades, as we'll see in a moment.

Volatility isn't all bad, however, as it ensures that there are more arbitrage opportunities in the crypto market than in any other market.

4 Types of Crypto Arbitrage Trading

Depending on the parties involved and how the arbitrage is conducted, there are various types of crypto arbitrage. The four main categories of cryptocurrency arbitrage are listed below.

1. Inter-Exchange Arbitrage

In this type of arbitrage trading, you simply buy on one exchange and sell on another. Only two exchanges are involved.

Since this type of arbitrage trading depends on real-time asset prices, it's impractical to buy assets on one exchange and transfer them to another exchange to sell.

By simultaneously purchasing and selling the asset, you can avoid this as well as transaction costs. If you have assets listed on both exchanges, you can do this.

Assume you have 1 BTC and $20,000 worth of USDT on Kraken and Binance, respectively.

You can benefit from this opportunity by purchasing Bitcoin on Binance with your $20,000 in USDT while simultaneously selling Bitcoin on Kraken for $20,300 if Bitcoin is valued at $20,300 on Kraken but exactly $20,000 on Binance.

You will then profit from the $300 spread and avoid paying withdrawal and deposit fees when moving bitcoin from Binance to Kraken or vice versa.

2. Triangular Arbitrage

Despite involving three different assets, this kind of arbitrage trading is a little simpler because it is conducted on a single exchange.

Let's say you have Solana, Ethereum, and Bitcoin. You can take advantage of this arbitrage opportunity to acquire more Bitcoin if the last two assets are trading at a discount.

As an illustration, you might buy Solana with Bitcoin and Ethereum with Solana. Then you simply buy Bitcoin using Ethereum once more.

You'll end up with more Bitcoin than when you first bought Solana, and that's without sending Ethereum to another exchange and paying their high gas fees.

Since everything is done through the same exchange, there are no withdrawal, transfer or deposit fees.

3. Statistical Arbitrage

This entails trading assets and making money off of price discrepancies using mathematical models. Arbitrage bots, which are able to trade hundreds of assets concurrently, are also used in statistical arbitrage.

The bots make trades based on their predictions of whether a trade will be profitable or unsuccessful using mathematical models.

There isn't much for you to do because the process is largely automated rather than manual because bots are involved. As a result, it is more practical and less prone to errors.

4. Spatial Arbitrage

This kind of arbitrage trading exploits price discrepancies for an asset based on the geographical separation between each exchange. With the exception of the spatial component, it resembles inter-exchange arbitrage very closely.

Disparities in the demand for an asset are one factor that fuels spatial arbitrage. For instance, if you reside in a nation where there is a high demand for Bitcoin, you can buy from an exchange based in a nation where there is a lower demand for the asset and sell on regional exchanges there.

This gives you an immediate profit because the higher demand means the bitcoin is worth more. This sounds like arbitrage between exchanges, but you don't have to buy and sell based on real-time rates; you can buy from one exchange and manually transfer to another to sell at a profit.

Pros and Cons of Crypto Arbitrage Trading

Crypto arbitrage trading has its good and bad sides, as one might expect.

Pros

• trading method with little experience and low risk

• both low and high volatility can be achieved

• Most arbitrage trades don't involve a lot of fees.

Cons

• Rapid price changes brought on by volatility can make inter-exchange arbitrage difficult.

• assets on at least two exchanges may be necessary.

Is Crypto Arbitrage Trading Right For You?

If done correctly, cryptocurrency arbitrage trading can be quite profitable. Compared to day trading, for example, which involves trading actual market movements, it also carries very little to no risk.

Any of the arbitrage trading strategies mentioned above are worth trying if you have the necessary assets to trade and satisfy all other requirements.

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