For investors looking for high-frequency transactions with low-risk gains, crypto arbitrage trading is an attractive option.
Arbitrage trading in cryptocurrency is a trading strategy in which investors profit from price fluctuations in a digital asset across several marketplaces or exchanges. Crypto arbitrage trading, in its most basic form, is the process of acquiring a digital asset on one exchange and selling it (nearly) promptly on another at a higher cost.
It involves profit-making with little or no risk. Another advantage of arbitrage trading is that it does not require you to be a professional investor with an expensive setup to begin arbitrage trading. The increasing demand for arbitrage trading has contributed to the need for crypto arbitrage trading bots development.
The most important thing to understand about asset pricing on centralized exchanges is that it is decided by the most recent bid-ask matched order on the exchange order book. In other words, the exchange’s real-time price is the current price at which a trader buys or sells a digital asset on the exchange.
Decentralized cryptocurrency exchanges, on the other hand, price crypto assets differently. This method, known as an “automated market maker,” is entirely reliant on crypto arbitrage traders to keep prices consistent with those shown on other exchanges.
Decentralized exchanges use liquidity pools rather than an order book structure in which buyers and sellers are partnered together to trade crypto assets at a specific price and amount. Each crypto trading pair requires its own pool. If someone wanted to trade Ether (ETH) for the link (LINK), they would need to discover an ETH/LINK liquidity pool on the exchange.
Every pool is backed by volunteers who deposit their own crypto assets to provide liquidity for others to trade against in exchange for a proportionate part of the pool’s transaction fees. The primary benefit of this system is that traders do not need to wait for a counterparty (another trader) to acquire or sell assets at a fixed price. Trading can occur at any time.
A mathematical approach keeps the values of both assets in the pool (A and B) constant throughout the vast majority of popular decentralized exchanges. This method keeps the asset ratio of the pool balanced.
This means that in order to acquire Ether from the ETH/LINK pool, a trader must first contribute LINK tokens to the pool before removing ETH tokens. When this happens, the asset-to-asset ratio shifts (more LINK tokens in the pool and less ETH.) To re-establish equilibrium, the protocol lowers the price of LINK while raising the price of ETH. This encourages traders to withdraw the less expensive LINK and replace it with ETH until prices rebalance with the rest of the market.
Arbitrageurs in cryptocurrency can profit from market inefficiencies in a variety of ways. Among them are the following:
Cross-exchange arbitrage: This is the most fundamental form of arbitrage trading, in which a trader attempts to profit by purchasing bitcoin on one exchange and selling it on another.
Spatial arbitrage: It is an example of cross-exchange arbitrage trading. The main difference is that the exchanges take place in different sections of the country. For example, using the geographical arbitrage method, you may profit from the difference in bitcoin demand and supply between the United States and South Korea.
Triangular arbitrage: That’s the technique of shifting money between three or more digital assets on a single exchange to profit on a price differential between one or two cryptocurrencies. For example, a trader can build up a trading cycle that starts and ends with bitcoin.
A trader may swap Bitcoin for Ether, Ether for Cardano’s ADA token, and then ADA back to Bitcoin. In this scenario, the trader moved funds across three cryptocurrency trading pairs: BTC/ETH, ETH/ADA, and ADA/BTC. If the prices of any of the three crypto trading pairings change, the trader will end up with more Bitcoin than they had at the outset of the transaction. In this arrangement, all transactions are carried out on a single exchange.
As a consequence, the trader need not necessarily withdraw or deposit funds at several exchanges.
Decentralized arbitrage: This arbitrage chance is common on decentralized exchanges or automated market makers (AMMs), which employ smart contracts that are automated and decentralized algorithms, to decide the price of crypto trading pairs. If the prices of crypto trading pairs deviate significantly from their spot values on centralized exchanges, arbitrage traders can rush in and make cross-exchange operations between the decentralized exchange and the centralized exchange.
Statistical arbitrage: This blends economic, statistical, and computational technologies to conduct arbitrage trades at scale. This method is widely employed by traders that rely on statistical models and trading bots to execute high-frequency arbitrage transactions and maximize profit. These trading bots are automated trading systems that use known trading methods to complete a high number of transactions in a short span of time.
As with any online trading, trade software may be used to automate crypto arbitrage. Using a trading bot for crypto arbitrage shortens the time it takes to complete each transaction while increasing the overall number of transactions.
Using arbitrage bots allows you to benefit from opportunities that last only a few seconds or microseconds. Traders may prefer the little, consistent gains achieved in this approach since, of course, numerous small victories might add up to significant long-term profits. Exchanges are investing in crypto arbitrage trading bots development to integrate bots into their platforms to provide users with an opportunity to make money.
Integrating an arbitrage bot into your crypto exchange will enable you to provide your users with the following:
Market Data Analysis
This analysis will save the market data available in raw form from many sources, analyze it, and decide whether to buy or sell a certain Bitcoin asset. Most bots allow users to define which types of data are transmitted into the signal generator sector in order to receive exact results.
Market Risk Prediction
This is an essential component of a trading bot. Well, this, like the previous one, shows data to determine market risk. The bot will select how much to invest or trade based on this information.
Purchasing cryptocurrency assets using a trading bot is always efficient. Users won’t have to worry about delays or, more importantly, human error. As long as the bot collects correct data and develops proper algorithms, it may be able to trade assets with a higher possibility of profit. Another advantage is that these bots can work around the clock, seven days a week.
An arbitrage trading bot makes every decision based on perception. Unlike humans, it has no fear of losing or a desire for profit. Experienced traders might be competent in making sound decisions by repressing the sentiments, but this is not the same case for everyone, particularly novices. The cryptocurrency trading bot never allows emotion into the equation.
Aside from the material in this write-up, you should be aware that arbitrage bots are legal to utilize. This is a legal way to trade digital assets. This type of trading may be seen in all financial trading marketplaces. The concept of purchasing low and selling high is not new. It’s an age-old custom. All you need is the willingness to turn profits rapidly through a plethora of chances and the ability to quickly execute them with the lowest expenses and fees possible and the best rate of profit return.
At Antier solutions, we develop and deliver crypto arbitrage bots that can be seamlessly integrated into a crypto exchange. The bots we develop are capable of making well-informed, data-based trading decisions to help your users make money.
Connect with our subject matter experts to share your needs for crypto arbitrage trading bots development.