Blockchain and Cryptocurrency Advanced - Types of Arbitrage
When it comes to arbitrage trading, there are different types that is common in the crypto space. 3 main arbitrage types are; exchange arbitrage, triangle arbitrage and merger arbitrage.
Exchange arbitrage
Exchange arbitrage is one of the common arbitrage types in the crypto space. Exchange arbitrage is basically trading opportunity that involves a trader capitalizing on price differences between 2 crypto exchanges to make quick profit while taking very minimal risk. In exchange arbitrage, a smart crypto trader can spot that the price of a particular cryptocurrency is different between two crypto exchanges and capitalize on price differences to make profit.
For instance the price of ATOM/USDT is a little bit higher on Okex exchange with a price of $41.56 than ATOM/USDT on Huobi exchange with a price of $41.47. A smart trader who is quick enough to who spot the difference in price of ATOM/USDT on Okex and Huobi can quickly buy ATOM on Huobi at a cheaper price, send it to Okex exchange and sell it at a higher price to make quick profit. To demonstrate this, a trader pays $809.4 to buy 20 ATOM on Huobi at a price of $40.47. The trader sends all the ATOM to Okex exchange and sell it at a price of $41.56, the trader will get $831.2. If we subtract $809.4 from $831.2, the trader will have a profit of $21.8.
Triangular arbitrage trading
This is another very popular type of arbitrage in the crypto space. Triangular arbitrage is basically a trading opportunity that involves a triangle of 3 cryptocurrency pairs. Triangular arbitrage involves a trader capitalizing on price differences between 3 cryptocurrency pairs to make quick profit while taking very minimal risk. If a crypto trader notices that there is a cross rate difference between MATIC/ETH, BNB/ETH and MATIC/BNB and MATIC/ETH and MATIC/BNB pairs are valued against BNB/ETH. The trader can capitalize on this price difference to make quick profit while taking very minimal risk.
Merger arbitrage
This type of arbitrage trading involves two merging companies. Merger arbitrage is basically a trading opportunity that involves a trader capitalizing on price differences between stocks of two merging companies. When 2 different companies want to merge and the news is made public, the value of the stock of both companies might decrease due to sentiments in the market. A trader can capitalize on this by buying the stocks at a cheaper price and sell it at a higher price when both companies merge and their stock becomes more valuable.
To demonstrate this, a trader finds out from a news that two companies will be merging. The trader becomes alert and buys the stock if the prices drops in value due to different sentiments in the market. Once the merging is complete, there is a high chance that the value of the new stock will increase in value which give would put the trader in profit.
