Crypto arbitrage is a trading system where individuals are trying to spot price differences across different markets on the same assets. What this means is that you buy cryptocurrency on one market and then take it to sell it on another one. This might confuse you since you might be wondering how financial assets can be worth less on one market and more on the other. But since these prices are being updated every second there are times when price discrepancies happen. This can happen with practically any financial asset, but when it comes to cryptocurrencies, the size of arbitrage is usually big. Since cryptocurrencies are highly volatile assets, their prices change very quickly and these changes can be pretty significant in size. Because of this, there are times when the difference in the price of a certain cryptocurrency can be significantly different across crypto exchanges. 

For example, you might see that the price of one Bitcoin on Binance is $27,900, while on Coinbase the price is $28,000. Once you see it, you can simply buy Bitcoin on Binance, transfer it to Coinbase, and sell it for a profit. This all seems really easy, so why did we mention that this is a complex trading style that not many people choose? 

When doing these arbitrage trades, traders need to take many different factors into account. For example, when you bought Bitcoin on Binance for $27,900 and transferred it to Coinbase, the prices on Coinbase might have adjusted and the Bitcoin can now be worth $27,900 there as well. There are also transaction fees that need to be taken into account. You might see an arbitrage opportunity, buy this token, transfer it, and sell it, only to see yourself left with less money than you started with. This is thanks to transaction fees being higher than the profits made from arbitrage. 

Because of this, traders need to have a perfect system in place where they can quickly analyze the market, understand price movements, and make quick decisions regarding trades they plan on making. For this, it is also important to be very focused on the market and be able to analyze different markets at the same time. This makes arbitrage trading one of the hardest trading styles, but if done correctly, it can yield very good profits. 

Looking at Arbitrage trading, from the surface it looks simple, but as we have discussed, this is a complex system that requires a lot of attention and expertise in order to succeed. With this in mind, it should not be surprising to learn that there are different styles of arbitrage trading, each aiming to capitalize on different aspects of the market. Here are some of the most popular types of arbitrage trading.

Cross-Exchange Arbitrage 

This is a style of arbitrage trading that we have already discussed. Cross-Exchange arbitrage trading refers to someone simply buying a cryptocurrency on one exchange and then selling it on a different exchange for a higher price. This is the most simple type of arbitrage trading and traders simply need to spot good price differences across different exchanges and make profits this way.

This type of arbitrage trading can be done on both centralized and decentralized exchanges. Since decentralized exchanges are using AMMs, the prices of cryptocurrencies depend on the liquidity of each crypto trading pair and demand on these pairs. What this means is that it is not that uncommon to see price differences between two decentralized exchanges. But since most people already know this, the difference in prices doesn't remain for too long and you should be quick when seeing this opportunity. 

Triangular Arbitrage 

This is one of the most complex arbitrage trading strategies out there as it involves three different cryptocurrencies and requires special trading tools to spot these opportunities. Triangular arbitrage can be done across different exchanges as well as within one exchange. When trading with a triangular strategy, traders are looking for three different cryptocurrencies whose prices don’t match up. 

When you are trading with triangular arbitrage, the first step is to trade one cryptocurrency for another that is undervalued on the platform. After this, you should sell this undervalued cryptocurrency for one that is overvalued. Lastly, to close the triangle, you should trade this overvalued cryptocurrency for the cryptocurrency you started with, and if done correctly, you will be left with more than you started with. 

As you might have guessed these price differences don’t show up quite that often, which makes it hard to spot when they do. Because of this, this arbitrage system requires the use of different trading tools that will assist us to analyze the market quickly and help to spot these opportunities on our behalf. But since these price differences don’t show up quite that often, trading with just triangular arbitrage is not a good decision to make, unless you have a very robust system that includes multiple different exchanges and is able to take quick actions when needed. 

Spatial Arbitrage

Another common arbitrage trading strategy is spatial arbitrage, which looks at price differences across different geolocations. This is pretty much the same as cross-exchange arbitrage, but here you don’t look at price differences between exchanges, but whole countries instead.

Since cryptocurrencies are traded on the open market, their prices depend on demand, and this is where spatial arbitrage comes into play. There can be a case where one cryptocurrency is in high demand in one country, while in another country the demand for this crypto is low. Because of this, this cryptocurrency will be trading for a higher price in the first country and for less in the second. Using spatial arbitrage, traders are looking for these opportunities and for making a profit. But since cryptocurrencies are becoming more and more globalized, most markets are following each other, and price differences between two different geological regions do not occur very often.

The only difference that can be found during spatial arbitrage is if we look at crypto markets that operate for only a select few regions. But since these exchanges are available to these select regions, getting into them will be challenging. Spatial arbitrage is probably the least used arbitrage trading strategy, but there are cases where you can profit really well from it. The most recent example of spatial arbitrage comes from South Korea when Kimchi Premium was offering a premium price for Bitcoin. When this was going on, a lot of people were buying Bitcoin on Western exchanges and then moving them to South Korean ones and making quite a good profit. 

Crypto arbitrage trading is complex to perform, yet a simple-to-grasp trading system that is used by many traders around the world. It requires a high level of attention and expertise, meaning that this is not a trading system designed for everyone. If you think you got what it takes to trade arbitrage, we would suggest making it part of your bigger trading plan. Arbitrage is a very situational-based trading system and opportunities might not show themselves all the time. Because of this, it is best to trade with cryptocurrencies in a regular way, such as spot, futures, and so on, and just make arbitrage part of this system. With this in mind, you can make profits from trading normally, and if an arbitrage opportunity pops up, you will be able to take advantage of that as well.