There are about 1000 cryptocurrency exchanges in the crypto market today. The numbers provide a great opportunity for cryptocurrency traders to make the most out of crypto trading, and take full advantage of crypto arbitrage.
If you are new to cryptocurrency trading and you wish to take advantage of the opportunities the market offers, especially for arbitrage trading, first, you’ll have to understand what arbitrage trading is and how to execute this strategy.
What is Crypto Arbitrage Trading?
Arbitrage trading is when a crypto trader buys a digital asset from one cryptocurrency exchange, then sells it in another exchange for profit due to a deviation in the price of the asset between markets. For example, one BTC could be sold at 40,000 dollars on Binance but at 40,080 dollars on Kucoin.
What a crypto arbitrage trader does is to purchase BTC on Binance, then sell on Kucoin for the profit. This helps many traders make a few dollars in the crypto market due to the discrepancies between exchanges.
It sounds like an easy thing to do; however, you need to understand the nitty-gritty of how it works and how it can be influenced or affected by the market. Just like every investment and money-making vehicle available, crypto arbitrage also comes with its own risk.
Before going into arbitrage trading, it would be best to learn the technicalities involved to effectively and successfully trade crypto arbitrage. This will help you consistently make good returns on your investment. If you wish to dive into crypto arbitrage trading, here are some things to know.
Some Projects Have Almost the Same Name
The crypto world today has thousands of different cryptocurrency tokens, and the number keeps increasing daily. Many of those tokens have similar names and symbols, making it easy to confuse one for the other.
For example, there is the project ‘SIA’ and the project ‘SAI.’ The project SIA is an application created for decentralized cloud storage solutions. Its symbol is similar to the project SAI, and even the name almost sounds the same.
It is easy to confuse these tokens for one another, which could make it easy to make the wrong call on your investments. This could result in you losing your investment as well. Although this seems like a basic thing in the world of cryptocurrency, it becomes significantly dangerous and more problematic when considering the number of crypto projects with identical ticker symbols.
Some other good examples can be seen with the project ‘CyberMiles’ and Binance with the ticker $CMT, $HNC (Huncoin), and $HNC (HellenicCoin), as well as ($BTCS) Bitcoin Silver and ($BTCS) Bitcoin Scrypt.
The list of these identical projects can go on for a while, making it a major cause for worry. If you are a new trader, you might find this challenging, and it might cost you a few bucks if you are not careful. This is because arbitrage trading deals with taking advantage of price differences, and it’s easy to confuse one crypto token for another.
You might end up purchasing the wrong token which might be doing poorly in the market. The sad part is that you won’t get a refund from the exchange if you erroneously send funds to the wrong wallet address.
To ensure such mistakes are avoided, before trading a particular currency, ensure you thoroughly compare the coin price on both exchanges.
If the price on one exchange is suspiciously lower than the price on the other exchange, you might just be investing in the wrong crypto token which you had in mind. Run a final check using the contract address of the desired token to ensure you are on the right track.
Exchange Wallets Could be Offline or on a Different Blockchain
Have you ever had difficulties trading on one of the exchanges you use?
If not, then you are just getting started. On some occasions, exchanges can decide to disable the cryptocurrency wallets on the platform, or they can choose to do it individually.
There could be several reasons for this. It could be due to maintenance on the platform or due to security concerns. This could even occur when you are about to finalize a juicy trade.
Therefore, there is usually a fixed page where most cryptocurrency exchanges indicate if they are online or not. They might also go as far as informing users about the service distortion and when the service will be back. Before consummating a trade transaction, always ensure you verify if the platform is offline or online.
Also, ensure that the token you want to trade on the exchange is provided by the exchange on the same blockchain. This is because if your token is moved between different blockchains, your investment will get stuck, making it difficult to recover, and leading to financial loss.
High Deposit and Withdrawal Fees
When trading between crypto exchanges, you will have to pay some fees for withdrawals or deposits. This is how these exchanges make their profit. The fees you pay may differ on each exchange. You might be paying extremely high fees for one of the exchanges and a cheaper fee for the other.
The cost of these fees could be due to the exchange’s withdrawal or deposit rate and the network the token is built on. Usually, the fees paid for a token built in the Ethereum blockchain are more expensive than those of other blockchains.
For this reason, it is important to read up on both exchanges’ policies on withdrawal and deposit fees before you proceed to trade. If this is not done, you might end up making a loss after the trade due to the cost of the fees paid between both exchanges.
Therefore, before making a trade, you can calculate the total fees to be made before carrying out an arbitrage trade.
Lack of Volume
The volume of the cryptocurrency token you wish to trade, which is available, is a major factor to consider before embarking on arbitrage trading. It is paramount to carefully confirm if the volume to enable a successful and effective trade on both exchanges is enough.
One major reason is that the cryptocurrency you invest in today could be delisted tomorrow due to low trading volume.
This means that token A could be bought from Binance to be sold on Hotbit for profit. However, just a few people are buying on Hotbit. Due to this low volume, token A could be delisted, leaving you with loads of coins that can’t be sold.
This happens often and has seen hundreds of cryptocurrencies being delisted from different exchanges.
If you are new to arbitrage trading, you have to be careful to avoid this. You might make a lot of profit and lose all because of issues such as delisting due to volume. So it is important to research whatever exchange you wish to trade on and the numbers the token you are trading has done before putting your investments there.
Pump and Dump Schemes
Today’s cryptocurrency market is all about making a profit, and one means many crypto traders use to make a crazy profit is the pump and dump scheme. This is an unfair way of making a profit in the crypto world, but since any government laws do not rule the crypto market, no one can fight this crime.
Pump and dump is a way many crypto developers scam traders. They inflate the price of their tokens, feed false information to the public, and spread fake positive news about the volume and price of the token.
The goal is to get traders to invest in these tokens, and once the price in the market rises to the needed value, these developers pull out the large percentage of the tokens they have. With this, they made huge profits, while the traders ran at a loss.
To effectively carry out this scheme, developers of these tokens engage lots of groups on social media to help with publicity, and when they have gained what they desire, they pull out of the project. Before buying into any cryptocurrency project, ensure it’s not a pump and dump.
Do a little technical analysis of the token, run a background check on the developers, and also study the use cases of the token. This can help you prevent being a victim of a pump and dump, but it is not guaranteed that you can’t be a victim of one of such schemes.
Your Account Can be Blocked, or Your Deposit Gets Stuck
Crypto exchanges can decide to upgrade or carry out maintenance on their platform at any time. This ends up disturbing transactions on the platform and could even lead to traders’ deposits getting stuck.
Your account could also be blocked due to one reason or the other, without prior notice or hacked when there is a cyber attack on these exchanges.
This is a regular occurrence in the crypto trading world. It can be frustrating to experience such issues, especially when it stops you from making those juicy trades which leads to you missing out on golden opportunities.
The sad truth about this is that such occurrences on these exchanges could take days to resolve. In a case where your funds get stuck, you might have to provide a proof-of-funds document to initiate the unlocking of your funds.
The result of this is that you lose valuable trading time, which means you are losing money. Unfortunately, there’s little traders can do about it, and it is a discouraging factor to consider. This is because most cryptocurrency exchanges are not regulated.
One way to avoid getting stranded due to such blocks and network fluctuations by crypto exchanges is to ensure that your funds are kept in a cold wallet. As a trader, this is one precautionary measure and habit you have to key into.
This gives you full control over your funds and also saves you from cyber attacks by hackers.
Changing Trading Fees
Something to be aware of is that exchanges are in the habit of adjusting their trading fees. This implies that one could enjoy low fees for a transaction today and pay more the next day.
A good example of this can be drawn from the Coinbase event in 2019. In 2019, the trading fees were hiked by 200% by Coinbase Pro for traders who had low volume.
This led to traders getting frustrated and even running at a loss on their trades. To avoid such unfavorable fee hikes, you have to constantly check the fee structure of the exchanges you are dealing with.
This will help you not get caught unawares, but it is not a solution because you don’t have control over regulating the fees these exchanges choose to charge.
Timing is key to taking advantage of the crypto market for arbitrage trading. There are always opportunities to get good trade deals and make good money, but the timing has to be right. This is because the prices of crypto tokens fluctuate, and these fluctuations can’t be easily predicted.
If you invest at the wrong time, you will end up losing all your investment. As a new trader, before investing in arbitrage trading, ensure you study the market properly and lookout for the best time to invest. Taking advantage of time is the best way to gain and make a profit.
Crypto Arbitrage Trade is Not a Sure Bet
Looking at all the factors discussed above, it is certain that crypto arbitrage trading is not 100% guaranteed. It comes with its positives and pitfalls, which new traders in the crypto world have to be aware of.
If you are new to crypto arbitrage trading, you might question the success of such means of investment or might want to stay away from it. It is good to be cautious of the kind of investment you are getting into, but also be aware that many traders have been successful in arbitrage trades.
However, this is not also a guarantee that you’ll make a profit with arbitrage trading, as many traders have lost top dollars through crypto arbitrage trading. Therefore, before investing in arbitrage trading, ensure you have done proper research and analysis of the market and how arbitrage trading works.
Consistently check out the price of tokens you are investing in on a wide range of trading exchanges to get the best deal. Also, have it in mind that you can lose out if this goes wrong.
What are the Alternatives to Trade Effectively?
Creating a strategy that works for you could be the best alternative to make the most out of crypto arbitrage trading.
One sure thing is you can never predict everything about the crypto market and will also miss out on opportunities due to daily human activities like sleeping and eating. However, if you have a strategy in place to help you cover for those lapses, you can trade effectively.
You can choose to install a crypto trading bot that would run all your trading activities 24/7. This helps you effectively execute all trades even when you are not online, or you are sleeping. If you are going for a trading bot, choosing the right bot is very key.
This is because just as there are many tokens and exchanges out there, there are also many trading bots. Choosing a tested and trusted hot is the surest way to get value for your money.