What is cryptocurrency arbitrage? What does crypto arbitrage mean?
Investors do not need to rely on a market to obtain the assets they want. As more and more platforms and exchanges welcome traders, many competitive markets offer the same products. Even in fields such as encryption, there are many places where people can buy and sell digital tokens. Generally, the asset price of one exchange should be the same as that of other platforms. However, sometimes there is a slight price difference, which leads to arbitrage trading. The following is a detailed introduction to the encrypted arbitrage transaction.
Arbitrage is a trading behavior that uses the price difference of an asset in multiple exchanges.
Although there are many types of arbitrage trading, they all involve the rapid purchase and sale of an asset to take advantage of the deviation of the quoted price. Although crypto arbitrage is very popular, this strategy existed before Bitcoin (BTC). Investors can find arbitrage opportunities in any tradable assets, including stocks, bonds and legal tender.
In fact, arbitrage traders play an important role in the financial market. Arbitrage will naturally adjust the supply of an asset on different exchanges, thus helping to level the trading price. Extensive arbitrage trading will attract attention to the pricing errors of the exchange, which may cause market makers to increase or reduce liquidity to adjust prices.
For example, stock traders may notice that the stock of Alibaba, a Chinese company, trades at $85 on the Nasdaq and $87 on the Hong Kong Stock Exchange. Traders can make a profit of US $2 on the Hong Kong Stock Exchange for each share of Baba stock they buy on the Nasdaq.
If an arbitrage trader buys 1000 shares of Pakistan shares at the price of 85000 US dollars and sells them at the price of 87000 US dollars in Hong Kong Stock Exchange, they will gain a profit of 2000 US dollars. In this case, the arbitrage trader will also consider the current exchange rate between the US dollar and the Hong Kong dollar, which may increase or decrease the success rate of this transaction.
Cryptographic arbitrage trading is the same as traditional market. Whenever traders notice the price inefficiency, they must quickly buy and sell assets across platforms.
The only difference is that cryptocurrency arbitrage traders focus on cryptocurrency assets such as Bitcoin or ETH. Another difference between traditional and encrypted exchange arbitrage is that the latter can target centralized exchanges (CEXs) and decentralized exchanges (dex). In the traditional market, arbitrage traders can only enter CEXs through institutional market makers.
Dex is a new innovation in the field of decentralized finance. These blockchain-based exchanges do not rely on centralized market makers, but use a technology called "liquidity pool". Anyone with encrypted wallets can provide tokens to these fund pools for point-to-point transactions. Since the liquidity pool is operated based on smart contract code, there is no central institution to promote transactions.
Unlike CEXs, dex is not regulated or liquid, which means they usually provide more arbitrage opportunities for crypto traders. In addition, dex relies on arbitrage trading to balance the token pairs in its liquidity pool. When arbitrage traders adjust the supply of tokens in the trading pair, they naturally help to balance the quotation.
In addition, there are password arbitrage robots, which are computer programs that automatically buy and sell passwords according to preset algorithms. The trading robot links with the user's exchange account through API and automatically trades when it detects price fluctuations. Although people can use trading robots to carry out many transactions, they are very common among arbitrage traders. Because arbitrage requires traders to move quickly between multiple platforms, automated trading robots may bring traders the speed they need to succeed.
However, encrypted transaction robots can never guarantee profits. These software programs are only as good as the algorithms used by traders. In addition, because trading robots need higher initial investment, they will erode the profits of arbitrage traders. Although the arbitrage robot is becoming more and more important in cryptocurrencies, traders must weigh the advantages and disadvantages of this technology before trying.
The above is the explanation of crypto arbitrage. Cryptocurrency arbitrage is a legal transaction and plays a vital role in the financial market. In fact, if there is no arbitrage trade, it is doubtful whether DEX like Uniswap can run as smoothly as they do.