Ehe arbitration refers to the process of buy cryptocurrencies in a exchange at a low price and sell them on another exchange with a higher price. This is possible since different exchanges generally have different prices for the same cryptocurrency. This price differential situation is used by traders to make a profit on their investments using arbitrage.
This process is possible due to the way how the price of cryptocurrencies is calculated. Remember, that the price of them is formed by the pressure between demand and supply of those who sell coins and those who want to buy them. A dynamic bid that little by little is driving the price downward or high depending on the case. What ultimately allows this type of practice to be possible.
Now, How do traders use arbitrage to generate profit? Well, that's what we'll see next.
How does arbitration work?
The best way to understand how cryptocurrency arbitrage works is with a simple example, and that is precisely what we will do.
First, imagine that a trader has bought 0,1 BTC on exchange A, at a price of € 9000 per BTC. In total, the purchase investment of the trader is € 900. But once the trader has these 0,1 BTC, he offers them for sale on exchange B. Only in this case, exchange B has a price of € 9500 per BTC. This means that the 0,1 BTC would have a value of € 950, and for the successful sale of them, the trader will have a net profit of approximately € 50.
Does that seem too little to you? Well, the truth is not, especially considering the scale of the initial investment. To make it easier, we are talking about a 5,56% profit in an operation that can take up to 30 minutes. At this point let's ask ourselves, What would happen if the initial investment had been 1 million euros? The calculation is simple at this point, using the percentage expressed above and multiplying by the new quantity:
Revenue Gain = € 1.000.000 * 5,56% = € 55600
A small fortune made in just two operations, one to buy and the other to sell for a cryptocurrency on two different exchanges. At this point, we no longer talk about little and the truth is that this arbitration, more than something rare, happens all the time in the world of cryptocurrencies.
What makes the cryptocurrency arbitration process possible?
The arbitration process is possible due to different factors, among which we can list the following and most fundamental:
- Liquidity and price differential between different exchanges. Having an exchange with high liquidity generally encourages the crypto price to maintain a high margin. This is due to the high demand and supply and the consequent transit of money in its different forms. Thus, an exchange with high traffic and liquidity will generally have a better price than one with less traffic and less liquidity.
- On the other hand, exchanges have a diversity of users that make prices act specifically. For example, an exchange with a large number of institutional users will have a downward price differential compared to one of personal users.
- The location of the exchanges also plays an important role in influencing the prices of cryptocurrencies. In countries with a greater demand for a certain cryptocurrency, its price will tend to rise. This is contrary to countries where demand is low, where the price of that crypto will tend to fall.
- Internal events in the countries where the exchanges are also affect the price of cryptocurrencies. This point also adds to the fact of the price difference.
The combination of these factors are what make it possible for arbitration to be possible in the world of cryptocurrencies.
Is arbitration legal?
At this point you will surely ask yourself: Is arbitration legal? The answer is short and concise: Yes, arbitration is completely legal. In fact, there is nothing illegal when carrying out the sale and purchase of cryptocurrencies on different exchanges as long as you comply with the rules of each of them.
So if you plan to perform arbitrage operations with cryptocurrencies, you can do them without problems. With this you will not be breaking any law as long as you comply with the operating guidelines of the exchanges where you participate.
What is the best strategy to take advantage of arbitration?
If you are interested in arbitration, you will surely be interested in knowing a good strategy to get the most out of it. Well, in that case the best thing you can do as a trader are two things:
Prepare for anything
The world of trading is extremely dynamic, and trading in cryptocurrencies even more so. From one moment to another Cryptocurrency prices can fluctuate in incredible ways. Therefore, being aware of market signals is essential to carry out a good arbitration strategy.
Efforts should be made to minimize the impact of waiting on trade when arbitrating. To do this, you must act quickly in order to take advantage of any opportunity that appears before you. Remember that it depends on your arbitrage operations generating profits, if you make buy or sell operations at the wrong time, you may end up losing money irreversibly.
Know how to look for opportunities
Good arbitrage opportunities will not magically appear before your eyes, on the contrary, a good trader looks for these opportunities wherever they are. For this you must be very attentive to the order books of the exchanges in order to look for the arbitrage opportunities in them.
This is a complex task and requires time and practice, but once you control it you will be able to see the good opportunities more easily and take advantage of them.
Arbitration and the dangers of scams
Below we will explain how you will be scammed (if you are not already scammed). At least one of the most typical ways.
Despite all the wonders we have spoken about arbitration, we must say that not everything is perfect. Arbitration today has become one of the most common facades scammers use in the cryptocurrency world. The reason? It is eye-catching for anyone who is entering the ecosystem. But let's see it more clearly with an example.
The way to a scam using arbitration
We are a new user in the world of cryptocurrencies and we want to make money. We know a person who introduces himself as a representative of an arbitration company. This person tells us and convinces us that the solution of the company he represents is simply perfect.
In fact, it's so perfect that you don't have to lift a single finger to do it. Why? Because this company offers you something great, usually an arbitrage bot (robot) that will do all the work for you. You only have to invest in this platform. To do this, you must buy a monthly, quarterly or annual plan, and sit down to see how your money multiplies. A dream come true if we see it through the eyes of a complete novice.
Like trileros, and duped by your desire to make easy money because you have heard that cryptocurrencies make money, you will remove all critical sense from the equation.
In the end the manager convinces us and we buy the plan that will make us rich. The company gets our money and we immediately see how the arbitration robot performs its "magic". Everything seems to be fine, you even receive benefits that you can withdraw, you check the operations and they agree. Or so it seems.
The data matches, but you're constantly receiving benefits. Some will make up those benefits to give you less if the market goes down, to make it look more real.
You also think: How will they steal me if the robot I have bought cannot steal me because the credentials that the robot has do not have permissions to make withdrawals from your exchange? The truth is that they have already deceived you!
We explain to you. You have bought a supposed magic robot, for a huge amount of money, that simulates benefits so that you confess, and even attract good friends and family, without being aware that you are leading them to ruin, being manipulated by scammers. Scams like this already exist in Spain, and they drag many innocent people who do not know what they are doing.
For these types of scams to not be so obvious and people itch, they have to have some reality, as was the case with Bitclub Network They were actually mining cryptocurrencies, but only as a showcase for all the billions of mega mega pyramid scam they set up. Only minimally educated people detect these scams, which at the same time are difficult to detect, or super evident. Depending on your training.
Continuing with the robot, it does super simple operations, only for you to see that something is happening as a distraction and to stop thinking, and on the other hand the money you receive comes from the money that other people put in to buy new bots. Where does the problem come from? It is a Ponzi scheme of book.
How does all this end? Profits start to fall and then we don't get to the level of profits promised to us by losing some or all of the money. The dream of getting rich with arbitration comes to an end. And in general, the manager does nothing but disappear, making it evident that we have fallen into the trap of his scam.