If you are trading crypto assets, you will have to learn the various strategies in trading. Arbitrage is a trading strategy that aims to take advantage of price differences and imbalances between two different markets, by quickly selling the assets in a more profitable market. For example, if the price of a crypto asset on platform A is IDR 100,000 for every 0.001 coins, while on platform B the same asset is IDR 150,000 for the same amount and assuming you buy the asset on platform A and sell it on platform B, you will earn a profit, which equals to IDR 50,000. When traded at a high volume of transactions, this type of trading style can be very profitable for you.
How to arbitrage
Everyone who does an arbitrage strategy is referred to as an arbitrageur. To become an arbitrageur, you usually must have two or more accounts on each different exchange and also have assets in each of these accounts. This allows you to do arbitrage when there is a difference in market prices to earn profits. If you are interested in arbitrage trading, in Indonesia there are many exchange platforms that you can join and at certain times offer different prices for certain assets.
To help you get started, here are some steps to follow:
- Observing the price between one exchange and another
Once you have an account, make sure that you closely observe the assets you are looking to profit from and estimate whether the price difference is sufficiently profitable. In this type of arbitrage, the arbitrageur takes advantage of these price differences to make a profit. - Make sure that you have calculated all transaction fees
Often an arbitrageur forgets to calculate transaction fees which can result in overall losses. In arbitration and inter-exchange sales transactions, there are transaction fees and transfer fees. Often, the costs can be greater than the profits you earn which will make you lose money overall.
Arbitrage legality
Is arbitration trading legal? Yes, this activity is legal. An arbitrageur is generally a market maker whose function is to increase the overall volume of transactions by helping to provide liquidity. The increase in volume means that there is a smaller change in the price of an asset, making it better for long-term investors to buy without affecting the general price. As a result, the market becomes more predictable and less volatile in the long term.
Types of Crypto Arbitrage Strategies
There are different types of arbitrage trading. To better understand it, here is an explanation for each type of Arbitrage:
- Exchange Arbitrage
Crypto prices are very volatile. This is why asset prices on each exchange can differ from one another. In this type of arbitrage, the arbitrageur takes advantage of these price changes to make a profit. - Triangular Arbitrage
This type of arbitrage is commonly used in crypto. By finding the price difference between the three crypto assets and exchanging them for each other triangularly. Basically, this type of trading tries to take advantage of price differences across currencies. This type requires more complicated calculations than others and is usually used to minimize risk or lower transaction costs that can reduce profits.
Risks of Arbitrage Trading
Like any other investment, arbitrage also has its risks. Here are some risks that need to be considered so that you are better prepared.
- Limited Calculation Time
Price differences in the market usually occur in a short time and decisions have to be made quickly. In that very short time, you may panic and you may not be able to accurately calculate costs, risks, and profits. - Unexpected costs
As mentioned above, keep in mind that you will need to pay deposit fees, trading fees, transaction fees, and withdrawal fees. Sometimes there are other costs that can be forgotten or missed when we make transactions and this can result in losses. - Price Uncertainty
The price of digital assets is very volatile, causing the profits to be uncertain and also difficult to analyze. From there, you can only rely on a limited amount of time to make a profit and risk losing if it’s too late.
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