Crypto Arbitrage 101

Arbitrage is a trading strategy that involves the buying and selling of assets, in different markets, to yield returns based on price discrepancies. These price discrepancies, commonly referred to as the “premium,” arise due to internal and external market pressures.

Recent developments in today's technological landscape has given rise to cryptocurrency arbitrage - adopting the same principles of traditional arbitrage while augmenting the process with technological instruments. Crypto arbitrage trading is regarded as a profitable low-risk trading strategy when executed by trained professionals.

How does crypto arbitrage work?

The process for crypto arbitrage differs on a case-by-case basis, as experienced individuals opt to do it themselves. For the majority of investors, employing the services of trained professionals, equipped with the necessary technology and licensing, is advised. Arbitrage service providers facilitate the trading process, thereby mitigating volatility risks and reducing the administrative load. At FiveWest, our team of trading experts leverage proprietary relations and automated software to execute the simultaneous buying and selling of crypto assets on behalf of our clients. Our infrastructure ensures that both sides of each trade are executed simultaneously - mitigating risks associated with holding open trading positions.

What causes price discrepancies?

Crypto arbitrage revolves around price discrepancies between digital assets in local and foreign markets. These differences stem primarily from supply and demand imbalances across international exchanges. In South Africa, limited supply and strong demand drive the prices of crypto assets higher, whereas foreign markets benefit from greater liquidity, which keep the prices for these assets lower. Additionally, external economic conditions and ongoing local exchange controls further contribute to these price gaps. As a result, cryptocurrencies are generally cheaper abroad than in South Africa. This creates a unique opportunity for South African traders to capitalise on the price difference by purchasing crypto assets overseas and selling them locally for a profit.

Key risks with crypto arbitrage

Despite the fact that crypto arbitrage is considered to be a low-risk trading strategy, it is not necessarily risk-free. For beginners, there are three major risks to be aware of:

1. Execution risk

Novice traders, with access to limited resources, face executional risks which are often attributed to price slippage, order delays, and liquidity issues. Without the necessary expertise and technology, seamless execution of crypto arbitrage can be a daunting task.

2. Regulatory and compliance risk

Inexperienced investors may lack the knowledge to execute arbitrage in accordance with global regulatory frameworks. As crypto regulation varies on a country-by-country basis, inexperienced traders may incur resistance while executing trades - realising losses while holding open trading positions. From a South African perspective, it is important to be aware of the regulations surrounding international money transfers and investments.

3. Transfer and exchange risk

High traffic on inefficient exchanges, coupled with unforeseen trading fees, may leave investors vulnerable to price volatility risks and profit reduction.

It is advised that prospective investors employ the services of experts for crypto arbitrage, such as FiveWest, as service providers are equipped with the knowledge and tools to mitigate the aforementioned risks.

Due to local exchange controls, crypto arbitrage trading presents a unique opportunity for South African investors in search of a low-risk strategy to earn on their idle funds. Despite the fact that arbitrage is a low-risk trading strategy, prospective investors are advised to employ the services of trading experts - who offer an additional layer of protection against unforeseen risks.