Assessing the Risks and Profitability of Arbitrage Trading in Crypto

“Arbitrage trading is a great opportunity in the crypto industry unlike the traditional stock market, but it comes with risks that must be understood by every arbitrage trader. Also, there is a need to assess the profitability of this opportunity to make a decision on indulging with the crypto arbitrage opportunities”. 

Arbitrage Trading

Crypto arbitrage trading is the concept of seizing the opportunity of price difference for a crypto asset on different cryptocurrency exchanges. The profit is obtained by buying on one exchange with a lower price for an asset and selling on the other with a higher price. The volatility in the crypto market is one of the major drivers of this opportunity. To make a decision on whether to indulge in crypto arbitrage trading or not, the profitability assessment as well as the risk assessment for the crypto arbitrage trading must be done.

The Associated Risks

There can be a number of risks associated while indulging in crypto arbitrage trading and they are as follows:

Low Trading Volume

There is a chance that the coin you are trading in has low trading volume on an exchange that will result in the order not going through or not getting the price that the trader opted for. This will result in missed opportunity or even loss.

Network Congestion

The larger cryptocurrencies such as BTC and ETH have highly congested networks and arbitrage trading in these cryptocurrencies can result in orders struck for hours and in some cases even days. This will entirely defeat the purpose of arbitrage trading.

High Trading Fees

The arbitrage trading involves a huge number of trades and thus the trading fee is an important factor in determining the profits. The higher the trading fee, the lower will be the profits. Also, the crypto exchanges can change their fee structure anytime resulting in a risk.

Timing Risk

The profitability in arbitrage trading relies on timing. The arbitrage opportunities may only exist for minutes or a few hours until another arbitrage trader closes the deal. Thus, there is always a timing risk due to the above discussed risks.

Is Arbitrage Trading Actually Profitable?

Generally crypto arbitrage trading can be extremely profitable but it is not that easy to execute. The professional traders can quickly seize the opportunities and thus a retail trader might get only the leftovers or nothing at all. Also, trading fees is another issue that can decrease the profitability of such types of trading. Being profitable in arbitrage trading requires extensive research and identifying the niche. Once a niche strategy and market is chosen, the arbitrage trading can be executed efficiently and more profitably.

Also, at present when the number of crypto arbitrage traders are less and there is less competition in the market, arbitrage trading can be highly profitable if executed efficiently.

Disclaimer: The article is meant for the educational purpose only and in no way it should be considered as financial advice. Own research on the toExecutiumpic is advisable.

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