Arbitrage trading in the cryptocurrency industry refers to the process of trading Bitcoin or a cryptocurrency at a price from one exchange and selling it at a higher price at another exchange. This is a minimal risk method of making a profit from by taking advantage of price differences across exchanges.
Is arbitrage trading legal?
Cryptocurrency arbitrage trading is a legal way to make money, provided the trader is conducting their trades in countries where Bitcoin and cryptocurrency trading is legal. Unless otherwise specified, it is lawful because the trading is simply the process of capitalising on price differences between multiple exchanges.
In South Africa, no regulations against cryptocurrency arbitrage trading have been introduced. It is worth noting that the South African Reserve Bank (SARB) is aware of traders who conduct arbitrage trading across exchanges and borders and there has been no formal communication to halt the activity.
How does arbitrage trading work to generate income?
Certain countries and exchanges sell cryptocurrency at a premium price. This is especially common in emerging markets in developing countries. This, as a result of lower-income economies and less liquidity in the cryptocurrency market, compared to that of the developed nations. Simply put, there are more cryptocurrency trading opportunities in foreign, developed countries, which allows their cryptocurrency prices to reduce slightly to match the demand.
This means that traders have an opportunity to buy lower and sell higher. Arbitrage traders who have access to foreign markets can opt for an exchange where the demand might be lower. Thus, the cryptocurrencies have lower price tags attached to them and then sell their tokens in a country or exchange where the value is higher. This trade can then wrack up a neat profit, without the often associated risk of holding Bitcoin or trading cryptocurrency for fiat.
How to start Bitcoin and cryptocurrency arbitrage trading
Before someone can start making money from Bitcoin trading, the first step is to open an account at the exchanges which will act as the platforms for cryptocurrency trading. This requires gathering information about the payment methods, reviews of the exchanges, and analysis of fee structures.
After signing up and registering, the trader will buy Bitcoin or an altcoin at the exchange which promises the lowest price and then sell it at the exchange with the highest price. It is up to the trader whether to sell the profit for fiat or to use it to continue to make more money through arbitrage trading.
Are there fees involved in arbitrage trading?
The short answer: Yes, you will likely have to pay fees while trading. But you will still be able to profit!
The reason why: Most exchanges take a small percentage fee for all trades conducted on their platform. To make a profit, it is imperative to consider the fees involved. The buying price of the cryptocurrency, in addition to any transactional fees from the cheaper exchange must be lower than the selling price and transactional fees from the premium-priced exchange.
Transactional fees can include fees for every trade as well as the withdrawal fees for sending cryptocurrencies across to another exchange.
Why crypto arbitrage trading is such an exciting prospect
There are clear benefits to taking advantage of exchange differences to trade Bitcoin and other cryptocurrencies. These include:
Quick, easy gains
If things don’t go wrong during the trade, trading across platforms is an easy way to increase your assets. It’s also all in the timing, so making quick transactions can result in quick wins.
A wealth of opportunity
With countless exchanges across the globe, there are so many opportunities available to find cryptocurrency at a low price to sell at a higher price.
Less competitive than traditional trading
Since the cryptocurrency market is still relatively fresh, there is less competition for traders in comparison to the traditional trade markets. This means that there is more opportunity to find profitable trades without risk.
Is there a risk to arbitrage trading?
Like with any trading in any industry, there is a risk associated. Despite the connotation of the cryptocurrency market though, with volatility and roller-coaster pricing, arbitrage trading is one of the less risky methods to trade cryptocurrency. Bearing this in mind, there are the things to be aware of while trading:
This will minimise market movements, which might steal a profit you could make. The quicker you can make a transaction, the less likely market volatility will get in the way.
Traffic on the blockchain
The cryptocurrency blockchain can get congested if there are many transactions taking place at the same time. This could slow down your transaction, which adds to the risk of the market movement.
Make sure your platform or credit card has enough money available to capitalise on price differences if there is a sudden price movement and an opportunity presents itself for profit. You don’t way to fall short to buy on the cheaper exchange as a result of insufficient funds on hand.
Ready to trade cryptocurrency in South Africa?
Ovex is one of South Africa’s fastest-growing cryptocurrency exchanges not only do we offer South Africans the chance to buy and sell digital assets like Bitcoin and altcoins but we offer additional investment products that leverage high-speed trading, and exploit arbitrage opportunities in the market.
If you’re ready to invest or want to start trading digital assets in South Africa, then sign up for Ovex today