With cryptocurrency's volatility, arbitrage trading in these digital assets can give you an excellent opportunity to generate more profits.
However, executing an arb can be complicated and risky, just like other money-making ventures. This is where using an effective crypto trading strategy comes in.
What is crypto arbitrage
There are various types of trading strategies a trader can execute: one of them is crypto arbitrage, or arb for short.
It involves buying an asset in one exchange and selling it on another platform at a higher price to turn the price difference into a profit.
Although price fluctuations across various crypto exchanges allow you to make more money, it also comes with risks and other obstacles.
Most common beginner arbitrage fails
Below are the four common crypto arbitrage fails and how to avoid them:
Legal And Other Regulatory Considerations
Given the popularity of cryptocurrency in the financial market, rules and regulations are in place to regulate the use of these digital assets, especially in the trading world.
This poses a problem when you're using crypto arbitrage as a trading strategy, because you usually need to move money across geo borders.
Although crypto-related laws differ across geographical locations, most jurisdictions impose a general limit to the number of exchanges to use and digital assets to trade.
Due to these restrictions, you might be unable to get the most out of your arbitrage trading opportunities, like we posted way back in the day when people started thinking of arbing the kimchi premium in South Korea.
To avoid having your money stuck, it's essential to check the legal restrictions imposed by your state regarding crypto trading.
Even if you want to use for instance a bot for your Bitcoin arbitrage trading, you might have to check whether the software is allowed or has legal limitations on its use in your target market.
This is another crypto arbitrage fail that you should also be wary of when trading.
Typically, volume refers to the total number of contracts traded for a particular digital currency within a certain period. It's also defined as the measure of the market's liquidity and activity. For example, people own Bitcoin for buying and selling purposes. As such, it might be safe to say that there's a large volume of Bitcoin being traded in the market.
A problem arises when the crypto you're trading has too little volume. In that case, you won't be able to sell it for the price you need to break even. You can either sell at a loss or get stuck with your bag of altcoin for a long time, both probably resulting in financial losses for you.
To save yourself from this trading mishap, you need to check the volume of a coin and the daily transaction you intend to execute before using crypto arbitrage.
Check charting apps like Cryptowatch or Tradingview for volume information.
To explore several money-making opportunities with crypto arbitrage, you need to carry out a strategy as quickly as possible to ensure more profits.
Failing to act quickly increases your risk of losing because the market may move against your arb opportunity.
Entering into an arbitrage transaction that requires a long wait (such as when you need to deposit first) is a lost cause as the opportunity will disappear before committing your trade on time. Market conditions can change in just a few seconds.
To protect yourself against one of these crypto arbitrage fails, you might consider using tools to help you move fast to complete a trade with a profit. One such tool is an arbitrage trading bot which automates the trading processes. With an arb bot, you don't need to worry about logistics and significant market movements because the bot watches it over for you.
If you're paying deposit and withdrawal fees for a trading transaction, these costs might only render the crypto arbitrage trading strategy useless.
Since you're dealing with different exchanges for arbitrage trading, the fees charged by these platforms might be too high that would undoubtedly take out a chunk of your profit.
Hence, instead of making more money, you might incur financial losses when you place a trade.
To avoid this issue, it's important to get familiar with the deposit and withdrawal fees and with the trading fees of the exchanges you choose.
You can create a spreadsheet to note the price differences in each exchange or platform. That way, you can plan your arbitrage trading strategy properly to ensure a more favorable and profitable outcome.
Generally speaking, crypto arbitrage trading can be an excellent strategy if you know how to do it in the first place.
If you're armed with proper knowledge, you can make trading a more profitable venture. However, learning everything about this strategy also includes the problems you need to watch out for.
So, if you're planning to use arbitrage trading, keep the information provided above to know which failures or risks must be avoided to gain more profits.