Dealing with cryptocurrencies has become a new trend, one that has taken hold over the last decade, but really it mostly blew up during the last two years. Those who deal in crypto are usually considered either investors or traders.

The difference between these two groups is simple — investors are, as the name suggests, investing. They deal with crypto in the long term and try to make smart decisions that are more likely to make them a large profit over the course of several months, or even years, in some cases. On the other hand, there are traders. They work much faster and are exposed to more risk. They are buying coins only to sell them as soon as possible and make a profit while doing it.

Naturally, trading requires them to think and act quickly, and so they have developed a number of tricks that will allow them to profit in the short-term. One of the oldest, but still the most valuable techniques, is arbitrage. The technique is actually very simple, and it was used on the stock market for decades. However, for newcomers, it might be slightly confusing if they do not fully understand it.

The crypto industry is growing, and this can be witnessed easily by taking a look at the number of active crypto exchanges around the world. These days, there are hundreds of them, all of which have different infrastructure, markets, types of users, liquidity levels, and alike.

Due to all of those differences, the value of coins depends on different factors that surround each individual exchange. Making a profit from these different prices is what arbitrage is. In short, buying an asset such as Bitcoin in one exchange where it is cheap, and selling it in another where it is slightly more expensive will allow traders to make a small profit. That is all there is to it, and repeating the process constantly basically means that traders can earn money without having to think long and hard about the future potential of any coin.

While the process is simple in its core, there are other things that are making it complicated, and this is where the issues lie. For example, governments around have been suspicious of crypto ever since Bitcoin emerged 10 years ago. Because of that, they are bullying all exchanges and other crypto-related services, forcing them to introduce Anti-Money Laundering and Know Your Customer measures.

If these services refuse to do it, governments can shut them down after proclaiming them illegal services. This also makes it more difficult for traders to own accounts in different exchanges and in different countries. However, those who are trying to take advantage of major price differences depend on having access to various exchanges.

In order to prove their identities, they now even have to provide proof of their home address and even data regarding their bank account. Some exchanges even require that their users have a bank account in the exchange's home country.

One big issue that proves that the crypto market is still underdeveloped includes slow transactions. As mentioned earlier, the most important thing for traders is timing. They need to make their transactions when the price of a certain coin is at its lowest in one exchange, and at its highest in another. However, cryptocurrencies are still very volatile, and the prices change all the time. In other words, there is only a small window of opportunity that traders can take in order to get the best possible outcome.

And then, just when that opportunity arrives, they try to make a transaction only for it to get delayed. Once their transaction is actually processed, the opportunity is gone, and so is the profit. In fact, most traders consider themselves lucky if they are not experiencing losses due to this issue. Not to mention large withdrawal fees that accompany each exchange, as well as each transaction.

And that is pretty much it. These are the good and bad sides of arbitrage, as well as an explanation of what the process includes. Hopefully, some new traders will make use of this knowledge, only remember to carefully calculate the risks, and keep in mind that timing is everything.

Similar to Notcoin - TapSwap on Solana Airdrops In 2024

origin »

209 +