Sirwin
Sirwin
arbitrage

What is Cross-exchange arbitrage?


Cross-exchange arbitrage

Cross-exchange arbitrage is the simplest type of arbitrage trading. It is a trading practice exploiting the fact that prices of some digital assets trade at different prices on different exchanges. To benefit from this opportunity, one buys that asset on the exchange where it is cheaper, and simultaneously shorts it on another exchange. Let’s say, ETH trades $1,100 on  Binance and $1,130 on Bitfinex. Trader can buy ETH on Binance while shorting it on Bitfinex at the same time, thus pocketing $30 difference in prices.

 

Though arbitrage trading is a low-risk strategy mostly, there are things you should consider carefully when doing crypto arbitrage. Factors that can adversely impact your results are:

  • Trading fees. Though sometimes considered negligible by traders, trading fees eat into profit and can erode the profitability of any trading strategy including arbitrage.
  • If there’s not enough liquidity on one or both exchanges, you cannot exploit the arbitrage opportunity because you’re not able to buy or sell the asset without affecting prices significantly. With large market cap tokens, such as BTC or ETH, liquidity shouldn’t be of concern. But for small coins liquidity risk is real.
  • Counterparty risk. Even the largest exchanges can fail which was infamously proved by FTX collapse in 2022. So, whenever you trade on a CEX (centralized exchange), there’s always risk that your counterparty will not honour her obligation. However small it may be, but the risk is real.
  • Smart contract risk. All DeFi applications carry the smart contract risk. Therefore, if you do one leg of the arbitrage at DEX (decentralized exchange), you have smart contract risk.
  • Slippage refers to the difference between the price at which you expected to trade and the actual price at which you traded. If you wanted to buy BTC at $21,000 but ended up purchasing it at $21,015, this is slippage. Though it is a feature of trading, slippage tends to occur during times of high volatility.
  • Time-sensitiveness. Many traders with sophisticated tools and bots scan financial markets to capture arbitrage opportunities. That’s why if you’re not quick enough, it’s highly likely that someone has already exploited that opportunity and faded it away.

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fmiren
fmiren

commodity trader interested in crypto & writing about it


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