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What Is Arbitrage, and How Do You Find Opportunities in the Market?

Capitalising on arbitrage opportunities is a high-risk strategy that requires DeFi market expertise alongside quality scanners and trading bots. Learn the significance of arbitrage and discover how to leverage your knowledge to seize crypto opportunities.

Crypto arbitrage opportunities present a profitable and viable way to make money in the DeFi space. As the cryptocurrency market is in a stage of maturing, volatility still exists, creating opportunities for price ranges across various exchanges. 

However, the reward of arbitrage trading does not come without risk. Asset prices change quickly, so before you invest, ensure you have an in-depth understanding of what’s at stake to know how to capitalise on arbitrage opportunities.

What Is Arbitrage? 

Arbitrage is the activity of buying and selling assets over multiple markets. DeFi traders profit through arbitrage by buying cryptocurrency from one market and selling it in another for a higher price. 

Also known as “Triangular Trading”, traders attempt to find arbitrage opportunities to make profits on assets they have purchased for a lower price despite the product being of the same quality.

For example, if Bitcoin is valued at £100 on one market and £97.5 on another, traders can buy the cheaper version to sell for more on the corresponding exchange. So, for arbitrage to work successfully, there must be an asset price imbalance across one or more exchanges.

Arbitrage opportunities arise when large price differences occur between exchanges, such as significant changes in market conditions or exchange lags. It’s particularly prevalent within decentralised finance and cryptocurrencies due to the unpredictable nature of the market. 

Numerous cryptocurrencies are traded across thousands of exchanges each day, creating opportunities for arbitrage but via a complex and unpredictable financial landscape. 

How to Find Arbitrage Opportunities

Identifying DeFi arbitrage opportunities relies on having excellent experience and knowledge of navigating the crypto market. The key is not to underestimate the speed of exchange rates. 

Arbitrage is a high-risk strategy and requires crypto specialists to recognise when they appear, let alone capitalising on any opportunities.

Technical and Fundamental Analysis

Firstly, applying practises in technical analysis will aid your understanding of the specific asset value for arbitrage opportunities. Technical analysis allows you to understand the figures involved with current and historical asset prices without external interference.

Secondly, using fundamental analysis methods will help you gain a broader perspective of the external influences impacting market behaviour.

Combining both principles for your overall cryptocurrency analysis will improve your ability to assess and forecast arbitrage opportunities.

Crypto Arbitrage Scanners 

After enriching your understanding of DeFi buying and selling behaviour through reliable quality resources, the best way to seize on arbitrage opportunities is to invest in a crypto arbitrage scanner.

A crypto arbitrage scanner quickly analyses multiple markets and asset activity before providing real-time data across global crypto markets. 

Crypto arbitrage is all about speed. DeFi arbitrage scanners allow you to find opportunities fast. So, you can invest quickly with confidence.

Crypto Arbitrage Trading Bots

A DeFi arbitrage bot will monitor the prices of all cryptocurrencies across numerous crypto markets while potentially providing interest rates for borrowing and lending on separate exchanges. 

Crypto bots make significant investment opportunities as they assess the market fast within the short time frame you have to seize on the arbitrage opportunity. 

86% of all money moved in crypto trading involves crypto trading bots, with 94% of traders owning bots averaging between $5,000 and $100,000 of crypto value. 

Why Significant Crypto Arbitrage Opportunities Occur  

Various reasons can impact the decentralised finance market to cause price gaps between cryptocurrency exchanges. Here are some general examples of why arbitrage opportunities can occur:

Sudden Price Changes 

The relatively short history of cryptocurrencies has already seen remarkable price changes. While the market might be maturing, sporadic asset values seem set to continue. 20% drops and gains in a single day is no rarity in the world of crypto.

Liquidity differences between exchanges can also cause slower reactions to price movements, enabling those who gain insight first to strike quickly. 

In May 2021, we witnessed $1 trillion in value wiped from the global crypto market after Elon Musk abandoned accepting Bitcoin as payment for Tesla cars despite his initial agreement. This loss was also contributed by China announcing stricter crypto regulations. 

As you can see, external factors can have a huge effect on the market and subsequent asset values. Sudden crashes or rises in value can make fortunes but lose them just as quickly. To end on the right side, knowledge and respect must be paid to the market’s volatile nature.  

Government Restrictions 

When some countries take laws to restrict financial flow or devalue crypto, it can lead to cryptocurrency investors being unable to access crypto markets outside their country.

For example, South Korea has placed tight cryptocurrency regulations on all crypto investors, causing the supply and demand to change the overall market and affect certain assets and investors who must conform to the Financial Supervisory Service (FSS). South Korea is also considering a tax on income from crypto with a transaction framework planned for 2022 through the Ministry of Strategy and Finance.

In the UK, the Financial Conduct Authority banned the offering of crypto derivatives products to retail in 2021. However, on the other hand, the government plans to make the UK a “global crypto asset technology hub”.

These types of government regulations around the world can cause a spike in buying and selling markets affecting arbitrage opportunities for DeFi investors.

Transaction Costs 

Differences in prices occur through transaction costs which can vary across markets, as not every cryptocurrency exchange has the same transfer cost. 

Typically, transaction costs for traders with high trade volumes are lower, representing arbitrage opportunities. Average transaction fees range between $0.15-0.25 at 0% and 1.5% per trade.

Summarising Arbitrage for DeFi Investments

While arbitrage represents a genuine route to profiting from cryptocurrencies, it requires a thorough understanding of the DeFi market and automated tools for investing in opportunities. 

Remember, crypto arbitrage is a high-risk strategy and should not be undertaken without thorough expertise in the DeFi market. 

*Jet Protocol does not recommend or give advice on trading strategies, all trading is done at your own risk.

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