In the business world, trading is one of the businesses that can provide high returns. There are several categories of trading, for example trading forex, crypto and stocks. In all of these trading categories there will be the term arbitrage. Arbitrage trading is a strategy in the crypto world. Then, what is arbitrage trading?
Arbitrage trading is legal to do and users of this strategy are called arbitrageurs who are nothing but market makers. His job is to provide liquidity to increase overall transaction volume. An increase in transaction volume can affect the price of an asset significantly.
What is Arbitrage Trading?
Broadly speaking, arbitrage trading is a trading system by taking advantage of the price difference between two markets at the same time. For example, you buy crypto in market A at a low price. Then, this crypto is then sold in market B at a much higher price.
This arbitrage is common in many countries by providing a choice of crypto asset exchange services using unlimited high liquidity. Users of arbitrage trading strategies are also commonly referred to as arbitrageurs.
Arbitrage in the forex world is usually carried out by buying a certain currency and selling it in the same amount of trading size in another market at one time.
There are several types of arbitrage opportunities that you need to understand before using this strategy, including the following:
Retail arbitrage
Retail arbitration is arbitration conducted on retail products. This refers to large-scale purchases of products, retail for example purchases of supermarket products.
Statistical arbitrage
An arbitrage technique that uses complex statistical models to find trading opportunities that work in the user’s favor. Users of this type of arbitrage require high computational abilities and refer to average return strategies.
Risk arbitrage
Types of arbitration that utilize mergers and acquisitions. This type of arbitrage is commonly used in hedge funds or hedge funds. Users will buy shares and sell shares in the short term.
Negative arbitrage
Negative arbitrage has the effect of eliminating opportunities because the interest rate that borrowers pay on obligations, such as bond issuers, is higher than the interest rate on invested funds
Arbitrage Trading Strategy
The arbitrage trading strategy itself is divided into two types, namely simple arbitrage and triangular arbitrage. To understand both of them, you can listen to the brief review below:
Simple arbitration
Simple arbitrage is the easiest and most popular arbitrage trading strategy among traders. This strategy emphasizes buying assets at a low price and then selling these assets at a higher price. For example, you buy a digital asset in market A, then you resell it in market B at a higher selling price.
Triangular arbitration
Triangular arbitrage is an arbitrage trading strategy that has more complicated calculations so it is rarely used by traders. Generally, institutional investors with qualified resources often use this strategy. In its use, there is computer work support so that it is able to predict the amount of profit that can be achieved by traders.
An example of a triangular arbitrage strategy is as follows:
One day you have Rp. 600,000,000 in funds. At that time, the BTC IDR exchange rate = IDR 100,000,000, BTC/USD = 9,000 US dollars, and USD/IDR = IDR 15,000. Thus, the calculation of the arbitrage opportunity that you have is as follows:
- Trading IDR for BTC: can be calculated as 600 million/100 million = 6 BTC
- Continue by converting BTC to USD: 5 BTC x 9000 dollars = 45 thousand US dollars
- Selling USD to IDR = 45 thousand US dollars x 15 thousand = IDR 675,000,000
From the calculation above, it can be seen that from a capital fund of IDR 600,000,000 you can get a profit of IDR 75,000,000 by relying on triangular arbitrage. Even so, the amount of profit above does not include deducting fees charged, such as transaction fees or trading fees.
There are also three arbitrage methods in crypto trading including the following:
- Spatial arbitrage is arbitrage where the trader benefits from two different exchanges.
- Cross-border arbitrage is where traders benefit from transactions in several countries by trading assets at the same time.
- Statistical arbitrage is a mathematical modeling that traders use to trade.
Arbitrage Trading Risks
Even though it has a high return does not mean this strategy is without risk. In implementing arbitrage trading you must understand that there are risks that arise as below:
Unforeseen expenses
In crypto arbitrage, it is not uncommon for unexpected costs to arise other than transaction costs. For example, when you want to deposit some money on platform A to buy bitcoin, there are several types of fees. The existence of deposit fees, withdrawal fees, and trading fees can be one of the unexpected costs that you need to bear.
Price uncertainty
Asset prices, whether crypto, stocks, or forex, must face price uncertainty. Not infrequently prices tend to fluctuate or vice versa. Therefore, there is no certainty that using arbitrage trading will continue to generate profits.
Calculation time is limited
In seeking profits using arbitrage trading, it is necessary to pay attention to the calculation time. If the way you work is slow, then the opportunity to make a profit will also be lost. Not infrequently, traders face panic so that decisions are made rashly. A trader needs to carefully consider costs, risks and profits.
Mistaken risk
The arbitrage process in buying and selling assets is usually fast. Therefore, there is also the risk of misdirection arising. To avoid wrong transfer mistakes, it’s better to make sure or be more careful before making a transaction. Do copy-paste to avoid typos.
Exchange risk
In crypto trading there is no insurance scheme available like the stock market. Moreover, crypto exchanges are not fully guaranteed by the government. This is because crypto is not controlled by any party, alias stands alone. You need to choose an exchange with a good reputation and be trusted to avoid this risk.
Asset transfers
There is a risk in transferring assets. Possible assets owned could be lost. There is also the possibility of bad assets in the long term. Therefore, it is important to choose an exchange with a fast transfer process and supported by a smooth internet connection.
Arbitration settlement
When conducting arbitral proceedings, no errors shall be made. For example, typos or mistakes in placing buy or sell orders. If an error occurs, of course it takes time to resolve which cannot be said to be short. You certainly don’t want to waste your time just to fix small mistakes, do you?
Things to Look For When Arbitrage Trading
If you are still a beginner trader, it is important to pay attention to the following points before doing arbitrage. The points in question include the following:
Capital
Capital becomes the most important part in arbitration. The existence of capital supports the trader to be able to buy the assets he needs. It is important for you to know the availability of capital you have. This can help traders to carry out small-scale and large-scale trades and calculate the return on the results they get
Time
As is known, in arbitrage trading it also depends on sooner or later, withdrawing traffic on that market. You need to take into account the transaction time and calculation time in choosing the asset to trade. For crypto exchanges, usually when the blockchain is over, it will also extend the transfer time of the crypto assets themselves.
fee
In arbitrage trading, apart from capital, costs will also arise. These fees can be in the form of withdrawal fees or trading fees.
Analysis
You also have to be able to do a thorough analysis to avoid losses. Consider the possibilities that occur for every decision you make.
Analyze inflation and issues related to the digital assets that you have. Fundamental and technical analysis can really help you in making decisions.
The final word
Also make sure that the platform you are using is a trusted platform. Choose forex, crypto, or digital assets through a legal process. How interested to jump as a trader? Have you dared to take arbitrage trading steps from now on?
(*)
Author: Muhammad Zaki Fajrul Haq
Follow me at @mzfajrulhaq (Instagram) or @ZakiFajrul (Twitter).