Crypto Arbitrage 101

Reviews | Trading

A simple definition of arbitrage in economic terms is the simultaneous buying and consequent selling of assets on different platforms, locations and exchanges in order to cash in on the price difference. However, in arbitrage the fundamental rule is that the quantity of the asset remains the same and the price difference should be enough to cover the cost of the said transaction.

Now, these assets could be securities, commodity, currency, and other financial instruments and lately added to this group is cryptocurrencies. In business, arbitrage is considered some sort of risk-free betting of sorts as the price differences and the transactions are easy to complete, definite and fixed. Oh and here is the kicker, arbitrage opportunities are rare and last a very short span of time. So the trick is to look for price disparities across different multiple exchanges at the same time.

How does arbitrage work in cryptocurrency

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In cryptocurrency trading, arbitrage works in markets with huge volumes in two separate markets. How to execute an arbitrage is by buying from the market with high coin volumes since the prices are cheaper and selling in the market with lower coin volume and high demand. There is also an existing reverse where one could buy from a small exchange and sell to a higher exchange.

Working theory: kimchi premium (sorry it sounds racist but work with me here). This is one of the most recognized factors that influence arbitrage prices. True to the adage, the phenomenon is experienced in Korea, where local prices for cryptocurrencies are usually set higher than the rest of the world.

Here is why; in Korea, there are very strict restrictions regarding cryptocurrency trading but no tangible regulations exist to govern how they work. The restrictions include:

  • No cryptocurrency trading for foreigners on Korea domestic exchanges
  • Offshore trading in Korea is limited to $50,000 maximum and to spend more money than that requires a lot of legal paperwork and proof of the business being invested to and if the reasons behind spending more are valid enough.
  • Sending money to a foreign account is a nightmare. For one, after the transfer, one has to pay the transaction fee, wait up to three days for the deposit to go through and pay the transaction fee a second time. Then proceed to buy cryptocurrency, send it to a Korean wallet before exchanging it to Korean Won.

With the above information, the Kimchi premium phenomenon has dominated the cryptocurrency market because to the crypto enthusiasts in Korea, it was a whole lot easier to hold as much cryptocurrency as possible. Literally over 3 million of Korea’s population participates in crypto trading, which translates to about 15% of Bitcoin trading volumes are in Korea alone. So the kimchi premium hit the roof and investors had a field day.

 Other factors affecting arbitrage opportunities

Market demand varies in different countries, as with the above discussed Kimchi factor, it plays a huge role in the manipulation of crypto prices. Demand and supply is the oldest business modus operandi, actually the only reason businesses exist in the first place. As such, different countries with their different economic needs have different levels of demand and or supply of cryptocurrency.

Foreign currency rates more often than not affect crypto prices. When the economy is bad, say like it is in a deplorable state like poor Venezuela, digital assets have always been a better option to store wealth. Just like governments back the value of the currencies they create, demand and supply dictates the price of cryptocurrencies. So the worse the fiat situation, the higher the demand for crypto will be as a replacement option.

Not all the clients are equal or have equal demands, so exchanges try to model themselves to suit the demands of their clients. For example, there are exchanges suited for large investors like institutions and tech companies whose order books are usually large, while another exchange may not have such a large portfolio which in turn creates an arbitrage opportunity.

Liquidity is hardly if ever the same across multiple exchanges. Which means that the prices on various exchanges may not be the same, or what you expect them to be hence you might want to think hard and quickly before making a trade.

Not all clients value exchanges in the same way. Now, I think so far you may have caught the drift with how careful one has to be while going about an arbitrage. For one, if you are using an exchange which has liquidity issues, you may end up losing on the opportunity since it cannot keep up with exchanges that are more liquid as per the currency undergoing arbitrage.

My advice is to open an account with an exchange which has an established track record. It would also be prudent to spread your fiat across two or three different exchanges because this is cryptocurrency we are talking about and its volatility is its highest disadvantage. Do not put your eggs in one basket.  

Exchanges, being basically businesses, have their own withdrawal and deposit timelines. Like I mentioned earlier, arbitrage opportunities are not very common and the windows for the arbitrage trades are even smaller. One of the reasons for this is because exchanges run like banks in some ways. That is opening and closing times, pertaining to the ‘shorts’ which in this case refers to the arbitrage trades. And this is stressed by the fact that transferring fiat in exchange for cryptocurrency varies since some exchanges offer the complete service within minutes and others have policies regarding their transaction processes which might take a little longer.  

Conclusion

Clearly, arbitrage opportunities are golden and you could make bank if it goes well. Information is power, so make sure that you are conversant with cryptocurrency arbitrage, even if you are not ready to invest yet. Research is necessary and paramount and the only way to detect an arbitrage opportunity is by researching different exchanges, even looking at the economic trends of crypto heavy hitters like the US. It also helps to understand the risks involved with arbitrage such as transaction costs, volatility, exchange policies and regulations that may have been undisclosed prior.  

 

 

 

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Crypto Arbitrage 101

Reviews | Trading

A simple definition of arbitrage in economic terms is the simultaneous buying and consequent selling of assets on different platforms, locations and exchanges in order to cash in on the price difference. However, in arbitrage the fundamental rule is that the quantity of the asset remains the same and the price difference should be enough to cover the cost of the said transaction.

Now, these assets could be securities, commodity, currency, and other financial instruments and lately added to this group is cryptocurrencies. In business, arbitrage is considered some sort of risk-free betting of sorts as the price differences and the transactions are easy to complete, definite and fixed. Oh and here is the kicker, arbitrage opportunities are rare and last a very short span of time. So the trick is to look for price disparities across different multiple exchanges at the same time.

How does arbitrage work in cryptocurrency

FREE CRYPTO COIN JUNKY HANDBOOK - 147 page guide covering Crypto Fundamentals, Beginners/Advanced Crypto Trading Strategies, Crypto Mining Techniques, ICO Investment strategies, and so much more.

CRYPTO TRADING STRATEGY GUIDES - Whether You're Day Trading, Swing Trading, Or Just Investing...Our Extensive Guides Will Get You To Where You Want To Be.

In cryptocurrency trading, arbitrage works in markets with huge volumes in two separate markets. How to execute an arbitrage is by buying from the market with high coin volumes since the prices are cheaper and selling in the market with lower coin volume and high demand. There is also an existing reverse where one could buy from a small exchange and sell to a higher exchange.

Working theory: kimchi premium (sorry it sounds racist but work with me here). This is one of the most recognized factors that influence arbitrage prices. True to the adage, the phenomenon is experienced in Korea, where local prices for cryptocurrencies are usually set higher than the rest of the world.

Here is why; in Korea, there are very strict restrictions regarding cryptocurrency trading but no tangible regulations exist to govern how they work. The restrictions include:

  • No cryptocurrency trading for foreigners on Korea domestic exchanges
  • Offshore trading in Korea is limited to $50,000 maximum and to spend more money than that requires a lot of legal paperwork and proof of the business being invested to and if the reasons behind spending more are valid enough.
  • Sending money to a foreign account is a nightmare. For one, after the transfer, one has to pay the transaction fee, wait up to three days for the deposit to go through and pay the transaction fee a second time. Then proceed to buy cryptocurrency, send it to a Korean wallet before exchanging it to Korean Won.

With the above information, the Kimchi premium phenomenon has dominated the cryptocurrency market because to the crypto enthusiasts in Korea, it was a whole lot easier to hold as much cryptocurrency as possible. Literally over 3 million of Korea’s population participates in crypto trading, which translates to about 15% of Bitcoin trading volumes are in Korea alone. So the kimchi premium hit the roof and investors had a field day.

 Other factors affecting arbitrage opportunities

Market demand varies in different countries, as with the above discussed Kimchi factor, it plays a huge role in the manipulation of crypto prices. Demand and supply is the oldest business modus operandi, actually the only reason businesses exist in the first place. As such, different countries with their different economic needs have different levels of demand and or supply of cryptocurrency.

Foreign currency rates more often than not affect crypto prices. When the economy is bad, say like it is in a deplorable state like poor Venezuela, digital assets have always been a better option to store wealth. Just like governments back the value of the currencies they create, demand and supply dictates the price of cryptocurrencies. So the worse the fiat situation, the higher the demand for crypto will be as a replacement option.

Not all the clients are equal or have equal demands, so exchanges try to model themselves to suit the demands of their clients. For example, there are exchanges suited for large investors like institutions and tech companies whose order books are usually large, while another exchange may not have such a large portfolio which in turn creates an arbitrage opportunity.

Liquidity is hardly if ever the same across multiple exchanges. Which means that the prices on various exchanges may not be the same, or what you expect them to be hence you might want to think hard and quickly before making a trade.

Not all clients value exchanges in the same way. Now, I think so far you may have caught the drift with how careful one has to be while going about an arbitrage. For one, if you are using an exchange which has liquidity issues, you may end up losing on the opportunity since it cannot keep up with exchanges that are more liquid as per the currency undergoing arbitrage.

My advice is to open an account with an exchange which has an established track record. It would also be prudent to spread your fiat across two or three different exchanges because this is cryptocurrency we are talking about and its volatility is its highest disadvantage. Do not put your eggs in one basket.  

Exchanges, being basically businesses, have their own withdrawal and deposit timelines. Like I mentioned earlier, arbitrage opportunities are not very common and the windows for the arbitrage trades are even smaller. One of the reasons for this is because exchanges run like banks in some ways. That is opening and closing times, pertaining to the ‘shorts’ which in this case refers to the arbitrage trades. And this is stressed by the fact that transferring fiat in exchange for cryptocurrency varies since some exchanges offer the complete service within minutes and others have policies regarding their transaction processes which might take a little longer.  

Conclusion

Clearly, arbitrage opportunities are golden and you could make bank if it goes well. Information is power, so make sure that you are conversant with cryptocurrency arbitrage, even if you are not ready to invest yet. Research is necessary and paramount and the only way to detect an arbitrage opportunity is by researching different exchanges, even looking at the economic trends of crypto heavy hitters like the US. It also helps to understand the risks involved with arbitrage such as transaction costs, volatility, exchange policies and regulations that may have been undisclosed prior.  

 

 

 

Author:

Leave a Comment

[js-disqus]

Latest Crypto News

Goals set by Justin Sun for Tron(trx)in 2019

On the 31st Of May 2018, Tron achieved independence from Ethereum and Launched its own Mainnet with the Intention of being a fully functional Public Blockchain that supports Creation and development of decentralized Apps (dApps)

Read More »

Crypto Regulation Commences in South Africa

The South African government today issued a statement regarding the steps it is taking on cryptocurrency trading by setting up a working group dedicated to regulating blockchain and crypto. Background Before we get into that,

Read More »

Facebook Hiring: 5 Cryptocurrency Positions Open

Something is definitely brewing in Facebook’s newly formed department. Early in May, there was a rumor that Facebook was interested in opening a cryptocurrency department within its headquarters. The advertised positions are: Two Software Engineers

Read More »

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Cryptocurrency start-ups have had a rough year with a huge section of them laying off loads of their workers with the  Bitcoin price crash. Bitcoin has lost around $280 billion of its value this year

Read More »

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