While comparing the prices of cryptocurrencies across exchanges at any time on any day, you will find that there is a remarkable price difference between the exchanges. The difference is usually between 1-2% but may vary around 4-5% also. Have you ever thought about why the prices vary in different exchanges although being the same coin?
Well, the price difference is probable since different crypto exchanges charge different fees from their investors. Also, the trade volume and liquidity on exchange determine the price value that may differ in exchanges. These price variations bring a new opportunity for crypto traders in the form of arbitrage trading where you can sell and buy an asset from one exchange to the other to make profits on the varying exchange rates.
How do crypto exchanges work?
Crypto exchanges allow investors to exchange their cryptocurrencies from one exchange to the other in lieu of fiat money into crypto. They set their crypto rates, both for coins and tokens which usually depends on buyers and sellers. However, there are other factors too that affects the price range.
Many crypto exchanges perform different functions and provide traders with various options. Some are built specifically for traders while others may prompt crypto and fiat exchanges. The crypto exchange that is built for traditional crypto traders will always allow you to buy and sell your coins at a lower commission than crypto-to-fiat exchanges. The trading platforms also charge a certain amount while you withdraw your money from your account.
Typically, a crypto exchange works on a similar principle followed by the traditional stock exchange. The only difference is that on the stock exchange, you buy or sell in the form of derivatives or shares so that you can earn decent profits while in the crypto exchange you have to use cryptocurrency pairs to earn money amidst the highly volatile currency rates.
Arbitrage trading while crypto exchange prices differ from one another
Arbitrage trading in the cryptocurrency world is like an opportunity that is employed by day and short-term traders. Many professional investors do make short term gains but may also implement the principle for a longer period. When determining how beneficial a crypto arbitrage opportunity can be, it’s crucial that you take into account the costs that an exchange charges. The arbitrage potential is nullified if numerous fees (trading fees, application fees, etc.) exceed the value difference of the actual deal.
There’s still good news for individuals who don’t have the time or energy to begin constantly searching for arbitrage possibilities. The values of cryptocurrencies across exchanges become increasingly aligned when other investors use arbitrage tactics. In essence, supply and demand converge at the spot price, which is the price of an object agreed to by both the buyer and seller at a specified time and location, generally on a single exchange. Price discovery aids in determining the genuine worth of the item in issue.
What are cryptocurrency pairs?
On a cryptocurrency exchange, trading pairs or cryptocurrency pairs are digital assets that can be exchanged for each other. Bitcoin/Litecoin (BTC/LTC) and Ethereum/Bitcoin Cash (ETH/BCH) are two instances of trading pairings. Due to the fact that some cryptocurrencies can only be purchased with other cryptocurrencies, understanding cryptocurrency pairs is vital for diversifying your crypto holdings beyond the most common coins; additionally, understanding cryptocurrency trading pairs allows smart crypto investors to profit from price differences between markets.
Which Cryptocurrency Pairs Aid in Arbitrage Opportunities?
It might be difficult to choose cryptocurrency pairs to use in an arbitrage trading strategy. There are some altcoins that are more linked between exchanges than others, and when the correlation is low, arbitrage opportunities arise. BTC is the most extensively traded and integrated digital asset in the cryptocurrency world. Nevertheless, if you trade on a less popular exchange or on trading pairs with low trading volume, correlation tends to be reduced. This leads to market illiquidity, which provides a chance for arbitrage.