Since cryptocurrency trading still in its early infancy & markets spread all around the globe, there may be notable price differences across various exchanges. Crypto arbitrage allows taking full advantage of those price variations, buying crypto coins on one exchange A where the price is significantly cheaper & simultaneously trading it on a different exchange where the price is higher.
Arbitrage means purchasing & immediately selling the same crypto asset in an attempt to gain profit from the temporary price imbalance.
With that in mind, when something is being sold on a market at a lower price & at a higher price on different markets, people can easily buy it from the 1st one & sell it on the second one, ultimately gaining profit from the transaction.
Arbitrage refers to the simultaneous buying & selling of a crypto asset on various markets in an attempt to profit from the price temporary price difference between the markets.
In a highly simplified model of how exactly cryptocurrency arbitrage works, you can search for any particular coin that’s significantly less expensive on Exchange A than on Exchange B.
You then purchase the coin on Exchange A and sell it for a greater price on Exchange B, ultimately keeping the difference.
The concept of arbitrage trading isn’t new and has, in fact, existed in bond, stock, & foreign exchange markets for many, many years.
Nevertheless, the rise in quantitative systems designed to recognize price differences & execute trades across markets has placed arbitrage trading out of reach for the majority of retail traders.
Furthermore, there are still plenty of arbitrage opportunities in the world of cryptocurrency, where a rapid rush in trading volume & inefficiencies across exchanges result in significant price differences.
Some of the larger exchanges with greater liquidity effectively control the prices of the rest of the crypto market, with smaller exchanges quickly following the prices set by their larger counterparts. However, most smaller exchanges don’t instantly reflect the prices set on larger exchanges, which is exactly where opportunities for crypto arbitrage arise.
Think of it as a complete & rewarding roadmap across validated cryptocurrency exchanges. The AE Path algorithm is made for quickly discovering multi & intra-exchange arbitrage opportunities while placing you ahead of the line.
We designed arbitrage Paths to be unique in a way that goes far beyond traditionally accepted quotes based on the “last-price” strategy. It is made to continually analyze & record book data in an attempt to measure liquidity for the purpose of analyzing the trade size as part of the complete arbitrage equation.
The end product is laser-accurate Intra & multi-exchange spreads that rarely fail.
All too often, however, because of a lack of crucial volume/liquidity data, novice arbitrage traders mistakenly trick themselves into unpleasant circumstances, where significant losses become an inevitable component.
Trading volume is an essential piece of information applied in computing every arbitrage path as well as found in high-frequency commodity trading algorithms.
When the trading formula is lacking a liquidity component, the outlook becomes inaccurate.
AE’s is designed to continuously scan the markets for wider price gaps while the matching algorithm runs through millions of potential combinations in an attempt to discover wide arbitrage opportunities.
Each arbitrage path goes through a rigorous validation cycle before it is displayed to you.
The validation process includes estimating the volume/liquidity for each pair, including the trade fees. This type of approach allows the algorithm to conclude in a much more accurate form.
Path’s algorithm combines inter-exchange as well as triangular arbitrage approach to validate the most rewarding opportunities.
This form of arbitrage is also called triangular because the trades are performed with three different assets.
The key fact to understand is that relevant prices for various assets on the single exchange are not always proportionate to each other — there are often great spreads.
For instance, let’s assume that the Bitcoin is traded for $9,500 on an exchange A and simultaneously you can get 43 ETH for 1 BTC.
Therefore what would be the price of 1 ETH when converted to USD?
Someone who took math classes in school would assume that it would be enough to divide 9,500 by 43 — to obtain $221 for 1 ETH. However, it would be a bit trickier than that.
Since the crypto market is often inefficient, relative price changes don’t spread immediately, especially during high volatility periods.
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Therefore, for a limited time, ETH/USD pair can easily get valued on the same exchange for $230.
Step 1. Buy 1 BTC for $9,500.
Step 2. Exchange your 1 BTC for 43 ETH.
Step 3. Sell your ETH for USD and get 43*230=9,890
In summary, the Arbitrage Path took the initial balance of $9,500 and displayed a quick Path to $9,890.
Of course, this is an idealized example; in reality, there are also trade fees to consider.
The intra-exchange arbitrage algorithm is designed for discovering opportunities within a single exchange as well as across multiple exchanges.
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Triangular arbitrage can be especially profitable during high volatility seasons.
The inter-exchange arbitrage algorithm is designed to display paths from an exchange where an asset is priced lower to another exchange where it could be sold for a higher price.
Arbitrage Path isn’t an automated bot, therefore a trader will be responsible for manually transferring the coin and re-balancing the wallets.
However, inter-exchange arbitrage, or buying on one exchange, and selling on another technique may present several challenges. The most important challenge is withdrawal times.
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When we buy a currency on an exchange for the purpose of withdrawing it to a different exchange, it must be mined and processed by the blockchain. Unless the miner’s fee is high, it is likely that the transaction will take some time to complete, after which the arbitrage opportunity has higher chance of disappearing.
Please keep in mind, often the inter-exchange technique may provide a short window in which you have to be able to execute the transactions.
Cryptocurrency space is very volatile, therefore the accuracy of collected data is crucial for the delivery of proper arbitrage quotes.
Unlike some tools in the space of arbitrage trading that primarily rely on [ticker last price], Arbitrage.expert goes far beyond by collecting real-time book data & analyzing each quote individually before displaying a spread.
What does it mean for a day trader?
The last price is simply an indicator of a closing trade, whereas the size remains an unknown factor. Nevertheless, it does not guarantee another execution of a significantly sized order.
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For instance, according to the last price a 0.01 BTC ASK order was executed for $9,500, there is absolutely NO guarantee that another ASK order of 1 BTC will be identically priced unless a book is continuously scanned, analyzed and matched with a multitude of available ASK order(s). This approach ensures the accuracy of the quote & eliminates any room for unnecessary errors.