Crypto Arbitrage: One of the Best Way to Make Money in the Bear Market

Crypto arbitrage trading
Crypto arbitrage trading

One major reason why people invest in digital assets is to make money. The major activity in the crypto market is buying low and selling high. Most investors and traders simply buy bitcoin and wait for a positive market movement to take profit.

However, cryptocurrencies are inherently volatile and the market is susceptible to wild price swings in both positive and negative directions. So, what happens when volatility is low and there is a dip in market prices? What will happen if the negative market trends persist and the market turns bearish?

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How can you make money during the bear market

A bear market is a widely popular term that is used to refer to a strong market downtrend that leads to a significant decline in prices over a prolonged period. The term is used across all financial markets such as stocks, real estates, and commodity markets to represent a prolonged downtrend in price

A market is said to be bearish when there is a significant decline in prices (usually 20% or more) over a sustained period (about 60 days). In crypto markets, the bearish run is often much stronger; crypto markets are quite smaller and more volatile when compared to traditional markets. Thus, it’s common to see a 60% price drop or more.

Bear markets are very punishing and brutal. Trading during a period of prolonged market downtrend is usually difficult and carries enormous risk. It requires a mindset shift, consistency, discipline, focus, and understanding of new strategies to be successful. The majority of investors generally avoid trading as they stand at risk of losing their investment.

However, bear markets present a range of opportunities to make money. The rapid price actions offer interesting opportunities which investors can take advantage of during a bear market. One of such is Arbitrage — a proven low-risk strategy to make money in cryptocurrency.

This article focuses on how arbitrage works in cryptocurrency, what it entails, how you can spot arbitrage opportunities, and how to take advantage of these opportunities during a bear market.

What is crypto arbitrage?

Crypto arbitrage trading is the practice of taking advantage of the price difference of an asset across different exchange platforms. It aims to generate profits through the simultaneous buying and selling of the same asset on different exchanges.

In the basic term, crypto arbitrage happens when traders exploit differing prices of an asset across two or more exchanges. For example, if the price of bitcoin is listed as $30,000 on Remitano and $30,200 on another exchange. You can quickly buy BTC on Remitano at a cheaper price and sell on the other platform at a higher price. Thus, you profit from the $200 price difference.

Arbitrage is not unique to crypto investment. It occurs across the capital markets, wherever the same asset trades for different prices on different platforms.

Why does arbitrage happen?

Arbitrage exists due to the inherent inefficiencies in the marketplace. Standard economic theories assume that markets are efficient and arbitrage opportunities cannot exist. However, in reality, market inefficiency occurs and traders use strategies like arbitrage to make outsized profits.

A look at the crypto market will reveal arbitrage opportunities. In theory, there should be no difference in the price of a coin across all exchanges. However, digital assets are inherently volatile with rapid price actions. Thus, there are often uncorrelated prices across multiple exchanges. Any difference in the price of the same asset on a different exchange is likely an arbitrage opportunity.

Arbitrage opportunities happen in crypto due to a plethora of market factors. Some of the major causes of arbitrage in cryptocurrency include:

  • Varied liquidity across different exchanges
  • Different trading volumes on different platforms
  • Different market demands in different countries
  • Foreign currency exchange rates

Two major types of crypto arbitrage opportunities

Crypto-crypto arbitrage: Crypto-crypto arbitrage exists when the amount of one crypto which you can exchange for different crypto is greater on one exchange than another exchange. Traders can profit from the difference in the exchange rate.

For example, if 1 BTC is exchanging for 20 ETH on Remitano, and another exchange is listing 1 BTC for 20.5 ETH. You can quickly exchange your ETH to buy bitcoin on Remitano, transfer the BTC to the other exchange and sell it for ETH, pocketing 0.5 ETH as a result of arbitrage.

Crypto-fiat arbitrage: This is the most common type of arbitrage in cryptocurrency. This opportunity opens when the amount you can buy or sell crypto for fiat is higher on one exchange than another. Fluctuating exchange rates of different fiat and country-specific crypto policies plays a huge role here.

Depending on the crypto-fiat pair, an exchange can be more or less across different platforms and countries. For example, it is slightly cheaper to buy bitcoin South Africa with USD, than if you buy bitcoin with RAND. Over the years, the price of the BTC-RAND pair is on average 5% greater than the BTC-USD pair. South African investors can easily make a profit when they buy bitcoin with USD and sell it for RAND on a local exchange.

Where to Look for Crypto Arbitrage Opportunities?

Crypto arbitrage opportunities are increasingly becoming rare as more exchanges adopt specialized real-time market tools to monitor and correct price changes. However, there are still plenty of opportunities out there:

  • Watch multiple exchanges
  • Watch multiple markets and countries
  • Look deep into exchanges order books
  • Employ the use of automated bots that track arbitrage

The major thing to be aware of is the right time to carry out crypto arbitrage. Nowadays, market price discrepancies are corrected quickly. Thus, it is of great importance to be fast and efficient when trading arbitrage.

Conclusion

Cryptocurrency gets a lot of well-deserved attention due to its wild price volatility, which carries a lot of potential for huge gains as well as huge losses. In that sea of risk, arbitrage is one tactic that seems fairly low-risk.

The volatile price action and constantly changing correlation that occurs during a bear market presents a wide range of opportunities for investors to make money. Investors can take advantage of these opportunities using a variety of trading strategies and tools available to take advantage of the market situation.

Crypto Arbitrage trading is a relatively safe trading strategy that takes advantage of price differences across markets. During a bear market, investors can look out for arbitrage opportunities and make profits from the market inefficiencies.