When it comes to trading, it seems that risk is an indispensable part of it. However, arbitrage has been a popular trading technique utilized immensely by traders and investors across the globe.
Since the advent of digital resources like decentralized exchanges, crypto arbitrage trading has emerged high in the DeFi space.
If you have heard the term before, arbitrage is an investment approach where investors buy assets from one exchange and sell on another by exploiting the price discrepancies in a different region or market.
This blog post will give you a basic understanding of cryptocurrency arbitrage, its different types, the process of crypto arbitrage, and how arbitrage bots are helping investors.
What is Cryptocurrency Arbitrage?
Crypto arbitrage trading allows investors to capitalize on the marginal differences and invest to earn instantaneous profits by selling assets at a higher value.
For example, you can trade Bitcoin across multiple exchanges, and you may observe the marginal differences in the pricing.
Once these pricing discrepancies occur and you ‘capture the arb’, you have the opportunity to buy the assets from one platform and sell them onto another.
What Types of Arbitrage Exist?
In this type of arbitrage, traders can buy cryptocurrency on one exchange platform and sell on another exchange platform in the next moment at higher pricing.
This arbitrage also follows the same foundational principle but relies upon price discrepancies caused by varied demands in different regions. The trader would buy cryptocurrency from South Korea at lower pricing and sell in an exchange at higher pricing through spatial arbitrage methodology.
The trader would trade their funds among three more digital assets in this arbitrage technique. For example, a trader can buy BTC on one exchange platform, sell them in exchange for ETH, trade ETH for ADT, and then buys back ADT for BTC.
Traders looking to utilize arbitrage methodology can trade decentralized exchanges or automated market makers (AMM). Such transactions can be accomplished using an automated and decentralized infrastructure.
This type of arbitrage demonstrates a trading technique through which traders utilize econometric, statistical, and computational methodologies to accomplish trades.
Traders use this mechanism to leverage increased amounts of profits and high-frequency arbitrage.
Key Considerations Before Performing Crypto Arbitrage Trading
After identifying the arbitrage opportunities, traders can analyze the market to identify profitable market strategies. As per the available trading resources, it can be simpler to initiate arbitrage trades as there is less risk than any other mode of trading.
But, there are some crucial elements that every crypto arbitrage trader must consider before they begin arbitrage trading.
While withdrawing your assets, you may need to pay withdrawal, deposit, and trading fees. To avoid and stay away from the demerits of traditional trading facilities. It is important for you to consider old case studies of different exchange apps such as Coinbase.
You may have to incur additional fees while paying out, which may be subject to waiving off if activities are kept within the limit.
Different crypto exchange platforms may have different trading volumes depending on several factors, i.e., daily sales, popularity, etc.
Trading volume creates significant impacts on the liquidity of the platform.
Since cryptocurrencies are unregulated assets. Thus, there is a high possibility that these assets can be vulnerable to hacks, frauds, data-related discrepancies, etc.
How is Crypto Arbitrage Trading Less Risky?
Crypto arbitrage trading has become popular because of fewer risks and high ROIs.
So, why is crypto arbitrage less risky?
There are two primary reasons for crypto arbitrage being risky.
- There is no predictive analysis involved, as the primary element that this type of trading relies upon is the price discrepancy across exchanges.
- Low-key exposure across the peers for seconds leads to the least trading risks.
How Do Crypto Trading Bots Work?
Cryptocurrency bots are tools used to automate trading. The primary goal of using these tools is to trigger activities that need to be performed within fractions of seconds.
A cryptocurrency exchange development company can help you create such a bot.
An arbitrage bot would check pricing for your desired crypto token on different exchanges and perform trading. These bots also utilize historical data to plan trading strategies. Traders can also customize certain activities to be performed by arbitrage bots, making the process faster and simpler.
Also Read | How to Build a Cryptocurrency Exchange App
Why Should You Develop a Crypto Arbitrage Bot?
Now that you understand the mechanism of a crypto arbitrage bot, you can comprehend why these applications are becoming popular among an audience of cryptocurrency traders.
But how a business leader can earn profits by creating a crypto arbitrage bot?
Here are a few parameters that can provide you with a clear and comprehensive answer to this question.
Least Investment Risks
Every arbitrage bot follows a risk-free mechanism of arbitrage where no real resources are invested.
The primary job of an arbitrage bot is to automate the arbitrage of cryptocurrencies.
Since you are earning additional revenues on collateral-free assets, arbitrage trades are a high-growth margin investment.
You can enable faster development of arbitrage applications with the help of an extensive technology stack and agile development process.
Arbitrage bots allow a fast, simple, and sophisticated implementation of investments. You can leverage an enriched functioning of arbitrage applications with smooth deployment.
Wide Scope of Opportunities
With an extensive scope of opportunities, business leaders can leverage prolonged growth-generating investments.
How Much Will It Cost to Build a Crypto Arbitrage Bot?
Estimating the cost of development is always a significant component of any project.
Crypto arbitrage bots are turning around the landscapes in the decentralized economy.
From market research, competitor analysis, and product design to development and deployment, various cost-driving components estimate the overall cost of creating an arbitrage bot.
Here we are dividing the cost of crypto arbitrage bot development based on different estimation elements:
Market Data Analysis
The Blockchain development company will help you analyze market data, risk prediction, and popular market trends in this phase.
Designing helps you create an interactive and prolific interaction between the app users and interface.
You may require an extensive technology stack to meet the diverse demands of crypto enthusiast audience.
The complete cost of developing a crypto arbitrage trading bot may estimate anywhere between $20,000 to $100,000. However, you may witness significant variation of the development cost depending upon real-time process elements.
The increasing popularity of crypto arbitrage trading has led to a higher-scale adoption of bots in trading. Traders can subscribe to programmed bots to streamline trading goals and attain maximum favorable results.
We, at SparxIT, are helping cryptocurrency traders and enthusiasts to leverage smart trading resources.
You can consult our experts to discuss cryptocurrency bot ideas and validate your plans.
Stay tuned for more such content.