Arbitrage trading is a strategy that allows traders to profit from slight price differences in the same asset across different markets or exchanges.
Arbitrage is a practice that has been around for a long time in traditional financial markets. However, virtual assets seem to have more buzz about arbitrage opportunities due to their decentralized nature and higher prices across exchanges. Because some exchanges trade more than others, it is possible for the price of an asset to vary greatly between exchanges.
An example of an arbitrage opportunity is when Bitcoin (BTC), the price on Kraken, was $17,212, compared to $16,979 on Bitstamp. A trader could make a potential $233 profit by purchasing Bitcoin (BTC) on Bitstamp and then selling it on Kraken.
There are many arbitrage opportunities in the virtual asset industry. There are hundreds of thousands of tokens traded 24 hours a day. This could benefit traders who are quick to react and eagle-eyed. You can also scan and track prices on BTC and other virtual assets across multiple exchanges using a variety of apps.
There are three types of arbitrage: spatial arbitrage, spatial arbitration without transfer, and triangular. As an example, we will use the Huobi Token HT (HT), a Huobi Global platform token that recently experienced an impressive and impressive price rise to illustrate how arbitrage can be performed.
Spatial arbitrage – This is simply trading HT on two exchanges when there is a price difference. It is the most basic form of virtual asset arbitrage.
Spatial arbitrage with no transfers— To avoid the risks and transfer costs associated with spatial arbitrage, traders can choose to trade long on HT on one exchange but short on another until prices reach a convergence. Although this helps traders avoid fees and transfer times between exchanges, they will still be subject to trading charges.
Triangular Arbitrage — This is where traders take advantage of pricing inefficiencies between different virtual asset trading pairs. If three assets have different conversion rates, an arbitrage opportunity could arise. A trader might trade HT for an asset with a lower conversion rate than HT on the exchange. The trader would then trade the second asset for an asset with a higher conversion rate than HT. This circuit will be completed by the trader trading the third asset for HT. He will end up with more HT than he started with.
Arbitrage can prove profitable when done correctly. Traders should pay attention to a few key points. First, asset prices can change at an alarming rate. This could cause you to lose money if the market moves against your position. Profit erosion could also occur if you don’t account for transaction costs and exchange fees.
Always exercise caution and be careful.