Arbitrage is a strategy entailing the buying of digital assets on one exchange and selling them off on another for a profit. There are a number of reasons why Bitcoin Arbitrage happens. For starters, liquidity is not the same across the different exchanges. Because different exchanges have different order books, the prices of digital assets can vary greatly. It is also possible to find one large trade on an order book that skews the trading in a certain direction. In such a case, the price will probably deviate sharply from the average price across the other exchanges.
It is possible to have the same price on two different exchanges but very different order book layouts. For instance, maybe the order price at the top is for a very small order and once it has been fulfilled, the prices will realign to the other prices which are typically more in number. This often leads to price difference across exchanges that can often in minutes or even seconds.
Another factor that may contribute to arbitrage is the different withdrawal and deposit times. If it were possible it instantaneously move your crypto across all the exchanges, the price differences wouldn’t be as high and as common as they are. An easy and immediate flow of fiat across the exchanges would easily correct any arbitrage conditions. The reality is that exchanges have different transaction processing time. While some allow for an almost instant deposit and withdrawal, others take hours or a couple of days to fulfill a transaction.
Why to find bitcoin arbitrage opportunities
As we have already established, arbitrage is as easy as buying cryptocurrency inexpensively on one exchange and selling it on another exchange for a profit. But how does one find these arbitrage opportunities? Well, there are a couple of ways to identify these opportunities.
Watching multiple exchanges
Identify the exchanges you wish to trade on and the digital assets you are interested in and then keep watching the price actions on these exchanges. This means not only checking the prices but the news and any other factor that might affect the prices. Keeping track of the exchanges will help you to notice the price difference as soon as it happens and that will place you at a better position to take advantage of the arbitrage opportunity.
Watching multiple countries
There is a lot of arbitrage that happens in different countries. Observe a number of countries, especially those that are known to attract a lot of public interest in the crypto space. You may want to pay close attention to government-related news about block chain because such news will influence the price action either positively or negatively.
Studying the order books
Looking deeply into the order books can help you identify arbitrage opportunities that might remain hidden to everyone else. For instance, you might notice an institutional buyer who is pushing the prices down on one exchange. This would provide an interesting arbitrage because the prices will most likely correct as soon as they are out.