Good day to you, friends and members of our CryptoPrime community!
There are many types of arbitrage strategies used by traders around the world in a wide variety of markets. However, when it comes to cryptocurrency, there are three types that are most widely used.
INTER-EXCHANGE ARBITRATION The most common type of arbitrage trading is exchange arbitrage, where a trader buys a crypto asset on one exchange and sells it on another. Arbitrage traders try to exploit these small differences in prices on exchanges to make a profit. How does this work in practice? Let's say there is a difference in the price of Bitcoin on Binance and on another exchange. An arbitrage trader wants to buy Bitcoin on an exchange with a lower price and sell it on an exchange with a higher price. Of course, timing and execution are critical.
FINANCE RATE ARBITRATION (Funding) Another common type of arbitrage trading among cryptocurrency derivatives traders is funding rate arbitrage. It means that a trader buys a cryptocurrency and hedges its price movement with a futures contract on the same cryptocurrency that has a funding rate lower than the cost of purchasing the cryptocurrency. The cost of the trade in this case means any commissions associated with the position. Let's say you have some Ethereum. You may be happy with this investment, but the price of Ethereum will fluctuate wildly. You decide to hedge your existing funds by placing a futures contract to sell (short) the same amount as your Ethereum investment. Let's say the financing rate for this contract is 2%. This will mean that you will earn 2% for holding Ethereum without any price risk, resulting in a lucrative arbitrage opportunity.
TRIANGLE ARBITRATION Another very common type of arbitrage trading in the world of cryptocurrencies is triangular arbitrage. In this case, a trader notices a price discrepancy between three different cryptocurrencies and cycles between them. The idea behind triangle arbitrage is to take advantage of price differences between currencies (such as BTC/ETH). For example, you can buy Bitcoin with BNB, then buy Ethereum with Bitcoin, and redeem BNB with Ethereum. If the relative value of Ethereum and Bitcoin does not match their value in BNB, an arbitrage opportunity arises.
Happy trading everyone!
