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Cryptocurrencies are sold daily, 24/7, but where does crypto arbitrage come in? Here we will understand a little more about crypto arbitrage.
What is Crypto Arbitrary Trading?
Arbitrage trading is a process in which one takes advantage of a price difference between different cryptocurrency exchanges. The main objective is to buy low on one exchange and sell high on another, maximizing your profit by making two trades instead of just one.
Let’s simplify through the following example, imagine that 1 BTC is costing $30,000 on one exchange, but is trading at $30,100 on another exchange. Because of this difference in value, there is an opportunity to profit $100 per arbitrage.
Despite being a simple dynamic, to carry out this negotiation manually and successfully it is necessary to have a high level of knowledge of cryptocurrency exchanges and also experience with arbitrage, which requires a lot of work and study, otherwise you may miss the opportunities that arise.
Therefore, many investors choose to program, or pay someone to program, a bot. He will be responsible for carrying out all this negotiation automatically.
Pros and Cons of Crypto Arbitrage
As we have already mentioned, the crypto arbitrage trading process presents a simple yet complex dynamic. Therefore, it is necessary to analyze the pros and cons of carrying out this type of negotiation.
Pros of Crypto Arbitrage
1 – Quick Profit: The purchase and sale of cryptocurrencies happen in minutes, so the profit potential in cryptocurrency arbitrage is faster than in traditional trading, in which the cryptocurrency is kept to sell later.
2 – Wide range of opportunities: The cryptocurrency market is growing, it is estimated a total of more than 390 cryptocurrency exchanges in the world, in which all presented a slight difference between the values.
3 – The cryptocurrency market is growing: As the cryptocurrency market is still considered new, there are fewer investors than traditional markets, which ensures less competition in business.
4 – Cryptocurrencies are incredibly volatile: Despite the volatility of cryptocurrencies being considered one of the main disadvantages of the market, for cryptocurrency arbitrage this is a great opportunity, since there can be big changes between exchange values, creating great opportunities.
Cons of Crypto Arbitrage
1 – Anti-Money Laundering Rules and Restrictions: This is not a potential cons, but to use most exchanges it is necessary to comply with KYC regulations, which may involve things like maintaining a bank account in the same country as the exchange. is headquartered.
2 – Fees: As users who use arbitrage trading deal with small profits, any fee applied on the trade can cause losses.
3 – Capital: In order to really profit from arbitrage, it is necessary to make a considerable initial investment.
4 – Withdrawal Limits: To carry out large trades, exchanges can set limits for withdrawals, which directly impacts desired profits.
Do I need a bot to perform arbitrage trading?
The convenience of using a bot to carry out trades is one of the great reasons for an investor to use this tool in arbitrage trading.
Although many consider the bot as the best option, it is necessary to analyze since we are talking about a high investment, both in time, for those who will program their own bots, and in money, for those who hire professionals to program.
Here we list the pros and cons of using bots to perform cryptocurrency arbitrage trading.
Pros of Using a Bot
1 – It is a profitable and low risk way to make money using your crypto assets and programming skills.
2 – The bot will always be connected, 100% dedicated to trading.
Cons of Using a Bot
1 – Need for specific programming knowledge.
2 – Failures in programming or technical aspects can interfere with the performance of your bot, reducing profits.
3 – If your bot fails, you will lose about 70% of your initial investment, having to start the whole process.