Cryptocurrency is still young. There are a lot of platforms available to buy and sell crypto’s. The methods of conversion as well as buying and selling differ too. To put it simply, some crypto platforms might allow purchases with only a particular currency or only particular forms of payments may be accepted. This creates an issue of different demands across different platforms. A lot of these platforms do not communicate well with others. There can also be discrepancies in rates of cryptocurrencies at which they are sold at different platforms. This creates a possibility of market arbitrage.

Cryptocurrency arbitrage refers to the simultaneous buying and selling of coins at different platforms to profit from the difference in their prices. While cryptocurrencies can be traded globally, they can only be bought with actual money according to what denomination a crypto platform is accepting. This makes keeping the price of cryptocurrencies the same across all the platforms a challenging task.

Also, trading larger volumes atone platform might drive the prices up at that particular platform, while sellers at other platforms would be selling at a lower price in a different denomination. For example, assuming there is an imbalance of rates in the US and Malaysia platforms. US platform is selling at a higher rate in dollars while the Malaysian platform is selling at a lower rate in ringgit. A person from Malaysia can buy at a lower rate then immediately sell at a higher rate at the US platform. This would enable him to earn a net positive amount after currency conversion. Arbitrage makes sure that imbalances among markets do not stay that way for long periods.

There is another form of arbitrage possible called inter-exchange arbitrage. This is analogous to triangular arbitrage. This arbitrage arises within the same crypto exchange or platform using multiple different cryptocurrencies. Given the rise of cryptocurrencies, they can be bought for each other. This makes it difficult to keep check of the balance between them. For example, instead of purchasing Bitcoin directly for US Dollars.

One can buy Litecoin first, exchange it to Ethereum and later exchange those for Bitcoins. This example only works if the person ends up with more Bitcoins than what they would have ended up with had they bought Bitcoins straight away. This method exploits the difference in exchange rates between various coins. This difference in price ratios also occurs due to significant differences in the cost of different currencies. While Bitcoins too expensive.

Ethereum and Litecoin have lesser values and are traded for each other quite often. Ethereum is also traded for Bitcoin in certain demand, but the demand for Litecoin to Bitcoin is lesser than both. This uneven demand gives rise to opportunities for arbitrage. To take advantage of arbitrage, the following factors should be kept in mind:-

• Liquidity - Platforms with a higher volume being traded has less volatility. While platforms with smaller volumes being traded often have a lot of fluctuation in prices.
• Availability - Not all crypto exchanges are open all the time. So it is sometimes easier to sell at one platform while difficult to sell at another in another jurisdiction. This again creates fluctuations in prices across platforms.
• Listings - When a coin gets listed on a major exchange, its price is volatile for a while. This gives rise to crypto arbitrage opportunities.

It is often difficult to keep an eye out at different platforms all the time. Exploiting crypto arbitrage and bitcoin arbitrage is a challenging job, and the window for arbitrage opportunity is often small. It is better to take advantage of arbitrage and analysis tools provided for by the websites to give yourself an extra edge. Also, certain things to keep in mind like withdrawal fees and trading fees which can both diminish your returns.

Torex crypto trading platform has developed the Arbitrage Tool that helps crypto traders to discover arbitrage opportunities on six crypto exchanges, including Bitfinex, Bittrex, Binance, Huobi, KuCoin, and Poloniex. 17 more crypto exchanges will be added within 2020.

Author's Bio: 

Torex.one is the first multi-functional blockchain trading platform. It is a cryptocurrency trading platform that combines all the necessary tools for efficient trading.