In the crypto-sphere we often come across references to “arbitrage trading”. Is arbitrage across crypto markets the same as in traditional financial markets? The answer is no.
In contrast to stocks and other financial products, crypto can be traded 24 hours a day, 7 days a week. Furthermore, crypto markets are way more volatile with cryptowhales lurking in the depths of the order books and a wide selection of alt coins such as ETH.
Different exchanges show different prices for the same coin. This, among other factors, makes crypto fit for arbitrage.
How to trade arbitrage
With so many smart people around the world, there are many ways in which people have been able to take advantage of market inefficiencies. The concept is simple.
- Buy at Exchange A, sell at Exchange B.
- Another way to trade arbitrage is to buy at Exchange A, while going short at Exchange B. Do not that this is less about making a profit and more about hedging against risk and keeping your funds at a stable value.
- Another way is if you’re already holding Bitcoin at two exchanges. While you buy at a lower price at Exchange A, you sell the same amount of Bitcoin at a higher price at Exchange B.
- Some investors take advantage of price differences across three different currencies.
Advanced arbitrage – arbitrage across borders
In the crypto industry, arbitrage is not just taking advantage of price differences between different exchanges. It’s also about trading across different jurisdictions.
For example, some traders buy Bitcoin in crypto-friendly places such as Japan and sell it at a premium to investors in places such as India, where crypto is harder to come by.
For example, at the end of 2017 the Korean market for crypto was soaring. The implementation of stricter AML regulations further boosted the demand of cryptocurrency, leading to what was called the ‘Kimchi premium’. While the regulators take restrictions on trading, the Bitcoin price was soaring, which was the so called “Kimchi Premium”.