What is arbitrage trading?

Arbitrage trading is the process of capitalizing on cross-exchange price discrepancy of a financial asset in cryptocurrency platforms and other financial markets. In other words, it is the practice of simultaneously purchasing and selling a cryptocurrency in different platforms to profit from price differences. One of the best things about arbitrage trading is that you don’t need to be a professional to do this. 

How does arbitrage trading work?

The most important advantage of arbitrage trading in cryptocurrencies for both individual and professional investors is that there are various applications that facilitate the process. These applications are really helpful and particularly ideal for those who want low risk and don’t want to invest much time or energy in arbitrage trading. Another key aspect regarding cryptocurrencies is timing. As more investors engage in arbitrage trading, the price advantage begins to disappear. So, investors who want to do arbitrage trading in the cryptocurrency market should pay attention to the transaction fees of the platforms. Arbitrage trading may not be profitable if transaction fees are high.

What is arbitrage percentage?

What is arbitrage percentage?

In the context of cryptocurrencies, arbitrage percentage refers to how much profit can be made in arbitrage trading. The arbitrage percentage stands for the difference between the selling price and the buying price. Investors should consider the commission rates of cryptocurrency platforms when calculating the arbitrage percentage. High commission rates may reduce the profits from arbitrage. Investors employ different applications for determining arbitrage percentages. With Felixo Exchange, you can generate profits by arbitrage trading and buy cryptocurrencies without wasting any time.

How to make arbitrage calculations

To calculate arbitrage, investors should first know the buying price, selling price and commission fees of a cryptocurrency on the cryptocurrency platform. Investors should subtract the buying price and the commission fee from the selling price in order to calculate the profit to be made by arbitrage. Then, they can find the amount of the profit by multiplying the result obtained by the amount of money invested. In triangular arbitrage, the price discrepancy between three cryptocurrencies is simply calculated to find the arbitrage percentage.

Arbitrage strategies

There are 3 main strategies for arbitrage trading. Cross-exchange arbitrage is the most common method, and the price discrepancy between platforms is crucial here. The second type of arbitrage is spatial arbitrage. The most important difference between cross-exchange arbitrage and spatial arbitrage is that the exchanges are located in different locations in the latter. The third type of arbitrage is called triangular arbitrage, which means capitalizing on the price discrepancy between three or more cryptocurrencies. For example, the investor can buy X coin with Y coin, then exchange Y coin with Z coin and finally return from Z to Y. In this example, the investor aims to make a profit by circulating his/her funds between three cryptocurrencies. If there is a difference in the price of these three cryptocurrencies, the investor can make a profit by arbitrage. 

Things to consider in arbitrage trading

For many investors, arbitrage trading is one of the best ways to generate profits from cryptocurrencies, but there are some things to consider while engaging in arbitrage trading in the cryptocurrency markets. Price fluctuations (volatility), transaction fees and transaction speed are among the most important factors to consider. Therefore, you should especially pay attention to these factors in arbitrage trading.

Price Fluctuations (Volatility)

It is a well-known fact that the prices of cryptocurrencies are highly volatile. Consequently, the first thing that should be heeded is the price volatility between exchanges in arbitrage trading. Prices that can change instantly can cause the investor to make a profit or a loss. While transferring a cryptocurrency bought at a low price to a new platform, a sudden drop in price may occur and this may cause the investor to make a loss. Sudden price increases, on the other hand, can make the investor gain more than s/he expected. 

Transaction Fees

Investors may encounter different commission rates when depositing, withdrawing or exchanging money during their transactions on cryptocurrency platforms. These commission rates can sweep users’ profits completely or make it possible for investors to make more profits. In order to avoid the losses that may stem from high commission rates, many investors prefer the Felixo Exchange platform, which has competitive transaction fees. Users can also invest in different cryptocurrencies and rearrange their portfolios thanks to Felixo Exchange.

Transaction Speed

Arbitrage trading needs to be done quickly because the price discrepancy gets mitigated as more investors start to capitalize on the price discrepancy between cryptocurrencies for arbitrage trading. So, the transaction speed of exchanges is a crucial factor to consider. In addition to the speed in the cryptocurrency exchange platform, the transaction speed of the blockchain your coins are connected to is also very important. On blockchains, transactions can be confirmed in 10 minutes or in 1 hour. Over the course of this period, there may be developments against the investor in the market. If you wish to begin arbitrage trading, Felixo Exchange is a safe choice with its high transaction speed. 

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Written by Bircan Akalın
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I graduated from Istanbul Bilgi University, Department of Business Administration in 2019. I continue my career as a Marketing Specialist in 2020, and now I work as a Marketing Communications Specialist. I also write articles on cryptocurrencies and blockchain on the Felixo Blog.