Nearly 1,000 cryptocurrency exchanges exist as of the writing of this article. The market is full of crypto buyers and sellers, which can be a great opportunity to make use of crypto arbitrage trading. How do you define arbitrage trading and what should be your consideration when implementing this strategy?
Short term crypto arbitrage trading
Arbitrage is the practice of purchasing an asset in one location and selling it in another. This allows traders to make a profit from price differences between markets. E.g. 1 $BTC can be purchased for $16,000 on Binance, but is also currently available at $16,020 on Kraken. So, you buy your Bitcoin on Binance. And hopefully you'll be able to quickly sell it on Kraken for $20.
Many traders are thrilled about the chance to make a few dollars from discrepancies in exchanges. However, before you decide to quit your job and cash in on the opportunity, read this article.
Crypto arbitrage, like all money-making vehicles, has risks. There are many things you can do to make this strategy work and get a consistent return. Today we will discuss some of these pitfalls.
1. Projects that share the same name
There are thousands upon thousands of cryptocurrency tokens you can buy, many of which have the same or similar symbols. This is evident in the case of the project SIA. It is an application for decentralized storage solutions and its symbol is very similar with another project called SAI'. You will end up losing all of your coins if the symbols are misinterpreted. While this might seem straightforward if you are a trader, it can be dangerous and alarming when you see the number of projects that have identical ticker symbols. This is Binance, the project SIA, and CyberMiles, which both have the ticker $CMT. Some other cryptocurrency exchanges also have $CMT, but it often stands for 'Comet.' You can find more such examples at $HNC and $HNC, both from HellenicCoin and Huncoin. Or ($BTCS), Bitcoin Scrypt or ($BTCS),Bitcoin silver. This is a problem that many traders face, especially newer traders. Worse yet, exchanges may not refund you if you send funds to the wrong wallet address.
You can avoid this error by taking a close look at both the volume and price for each option. If the price of a symbol seems low on one exchange, then it's likely the wrong symbol. To make sure that you are arbitraging with the right symbols, simply look at the logos of the projects - if they have differing logos it is not the same project.
2. Exchange wallets offline or on a different blockchain
Sometimes exchanges will decide to disable cryptocurrency wallets, either for the whole platform, or just one. This could be due to security concerns, general wallet maintenance, or even general wallet maintenance. It could happen right when you need to execute a lucrative trade and get a handle on your wheel.
A majority of cryptocurrency exchanges will provide a page on which you can check whether the wallet you require is online. Sometimes, they may also inform you when it should go back online. Before you make any trades, it is worth checking this page.
You should also double-check that token exchanges use the same blockchain. __S.29__
These are just a few factors that you should consider when using crypto arbitrage.
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3. High withdrawal and deposit fees
It is no secret that traders at all levels love withdrawing fees. HitBit charges 0.00085 BTC when you remove your Bitcoin from HitBit. This is a large chunk of your cryptocurrency.
This is why you should learn about withdrawal and deposit fees on the exchanges you trade with. This will ensure that you do not lose any potential profit and more in fees.
This problem can be avoided by simply calculating the total expenses prior to executing an arbitrage deal. Use a spreadsheet, or simply write the numbers down on paper. To help you get started, here's a helpful tool: it lists all fees associated with major exchanges.
4. Pump and dump scheme
The 'Pump and Dump’ schemes are a major threat to the cryptocurrency market. This is a scam that aims to deceive traders by artificially increasing the price an asset. It does this by feeding false positive news and price action. The goal is to sell large amounts of those coins for a huge profit.
There are only a few groups that are dedicated to Pump and Dump schemes. Every time they succeed, the people who purchased crypto last are left to hold the bag’ virtually unable to sell.
You can use technical analysis to determine if your purchase is in a P&D scheme. As technical analysis would require its own article, we are not going to cover it here. But you can look at the volume and 1-minute charts as well as other T/A indicators for clues.
5. Trade fees
You might find yourself paying a lot less for your favorite pair of pairs than you are on the exchange. Coinbase Pro raised their fees 200% for traders with low volumes in 2021. This led to frustration. You can avoid being caught by this fee structure by simply checking the fees every day.
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