The digital assets world never fails to surprise us. While mining and normal trading are ways that a person can earn in this market, due to the volatility, these assets open up opportunities for arbitrage trading as well. Arbitrage trading is when you buy on an exchange that has a lower price only to sell the same asset at a higher price on an alternate exchange.
By providing an opportunity to make some quick money, this form of trading has managed to attract opportunistic traders. If you have never tried arbitrage trading or have actually not made any profit in the process, read on to understand how arbitrage trading works.
What is Arbitrage Trading?
In the digital assets world, you can trade digital assets on the various exchanges. Most people who enter the market don’t look at multiple exchanges and the pricing they offer. For an arbitrage trader, you have to keep an eye out for opportunity.
For instance, as Zipmex offers to buy and sell in multiple countries, they can deliver exceptional pricing. At the time of writing, if you place a buy order for one Bitcoin on Zipmex.com.au at AUD 11,832.50, you could then find an exchange to sell your bitcoin at a higher price.
After some research, you may come across an exchange such as Indodax, where the price at the same time of writing is AUD $12,073.82. By placing a sell order, you could profit $241.32. Now, this, of course, isn’t taking into account Zipmex’s low fees. Still, it shows you if you observe the opportunities arbitrage trading certainly has its place.
You could even do the same with Ethereum, Bitcoin Cash, Litecoin and Ripple. The opportunities are endless, just as long as you buy low on one exchange (such as Zipmex) and sell high on another.
Each digital assets exchange out there is independent of the others. It means that not all exchanges will have the same value for a particular digital assets.
By doing arbitrage trading, you will be able to gain profits a whole lot faster. While arbitrage trading seems to be very simple, traders often underestimate and tend to lose money trying to execute these trades. Read on to understand the various aspects to consider when doing arbitrage trading.
How to Identify Arbitrage Trading Opportunities?
Arbitrage trading might sound simple in theory. You might also be thinking that you will now be able to perform arbitrage trading regularly. However, such opportunities do not pop up frequently.
To be able to profit from arbitrage trading, you will first need to calculate the opportunity. For example, if you are trying to execute arbitrage trades between Zipmex and Indodax, you must perform a cost analysis. Calculate if you will lose money, make only a few cents or make a worthwhile profit.
In the previous example, you must take into account the amount of exchange fee, as well as the miner fee. Only after these fees on both platforms can you understand your position.
So, before you go ahead with any arbitrage trading opportunity, make sure that you have calculated the profit margin. Only execute the trades that have provided you with the profit that you are expecting.
How Can You Take Advantage of Arbitrage Trading?
Making some easy and quick dollars by arbitrage trading is a great way to secure some profits. To take advantage of an arbitrage opportunity, you can follow any of the two techniques.
As the name suggests, it is the easiest to understand and execute in the real world. This technique is to buy on an exchange such as Zipmex where the prices are low and sell on any other digital assets exchange such as Indodax where the cost of that particular asset is higher.
Since you had bought the assets at a lower price and sold at a higher rate, you would have already made some profit from this trade.
Arbitrage trading might not always be between two different exchanges. Sometimes, you will be able to spot arbitrage opportunities within the same exchange.
You might now be thinking how the price of a digital assets would be different on the same digital assets exchange unless you had invested a while back. That is where digital assets trading pairs come into the picture.
Almost all exchanges out there also support digital assets trading pairs on their platform. So, you will be able to make use of the price difference between the trading pairs to perform arbitrage trading.
For example, in an exchange like Zipmex, you will be able to convert Bitcoin into Litecoin. You will then be able to convert Litecoin to some other digital assets which would then be converted into Bitcoin.
During the entire process, make sure that the amount of Bitcoin that you have is more than the amount you had in the beginning. Thus, arbitrage opportunities do exist within the same exchange as well.
Risks Involved in Arbitrage Trading
All investments and trades out there come with their own set of risks. Arbitrage trading is no exception.
Underestimation of profits
Traders often tend to underestimate the possible earnings of an arbitrage trade. Apart from making sure that the price of a digital assets is lower on one exchange and higher on another, you will also need to estimate the profit that you might make after all the fee is resolved. That is something that new traders miss and end up losing their money in arbitrage trading.
Uncertainty of the price
digital assets prices are extremely volatile. It means that the price keeps changing regardless of the exchange that it is being traded on. When you try to execute an arbitrage trade, there always exists a risk where someone else might take advantage of the opportunity. Hence, there is no way that you can be sure that arbitrage trading will result in profit.
Arbitrage trading is one of the best ways to be able to increase your overall digital assets portfolio in a brief period. However, finding such opportunities is a challenging task. That is where you will have to research to find them. We highly suggest Zipmex as the place to buy digital assets. Our prices are competitively cheaper than many exchanges as we thrive on an economy of scale model.
Now that you have sufficient knowledge about arbitrage trading try to identify and execute some arbitrage trades, and make some quick money.