idiot's guide to cryptocurrency arbitrage
cryptocurrency arbitrage
- so basically, cryptocurrencies (bitcoin, litecoin etc. - the list goes on) are a form of currency; so you exchange £ for BTC, for example, then trade BTC on an exchange - which is like any currency exchange.
- bearing this in mind, any form of 'real-life' trading techniques (like used on NY stock exchange), apply to these exchanges.
- a common trading technique is arbitrage; which is basically taking advantage of a price difference between two exchanges;
an example:
on exchange 'a', stock 1 is trading for £10, and there are 10 stocks available.
on exchange 'b', stock 1 is trading for £12.50, with lots of stock available.
- to take advantage of the price difference, you would buy all of the stock 1 at exchange 'a', and sell it at
exchange 'b', giving you a profit of £25.
- note that you must have money on the exchange beforehand; if you have to transfer money from your bank account, say,
it's likely that the opportunity will disappear very quickly.
- an arbitrage bot will concurrently poll multiple exchanges, comparing buy/sell prices to find price gaps between exchanges;
upon a difference, it will buy all the available 'stock' at the exchange with the lowest sell price, and sell it at the exchange
with the highest buy price. (note that this is simplified as exchanges use buy and sell orders, so you may have to sell different
fractions of your 'stock' at different prices, but still for a profit.)
- with this method, there is no way to 'lose money', except it your 'stock' devalues.
- an arbitrage bot is great in the fact that it can buy and sell 'stock' instantaneously, whereas a human trader may have to
calculate profitability, and will take a moment to place an order. It can also function 24/7, unlike a human trader.
