There’s so much knowledge that we can gain from both structured and unstructured data which can be used to improve every aspect of life. This is the whole essence of data science— where various scientific methods, algorithms, systems, and processes are used to extract relevant information.
Crypto enthusiasts with various crypto portfolios are always on the lookout for opportunities to make more profit through their various investments. Fully aware that investments in cryptocurrency are quite risky – as with any other volatile investment opportunity – many crypto enthusiasts reply on predictive analysis to decide on whether to buy or sell their investments. This leads many of these crypto enthusiasts to search for profitable arbitrage opportunities that give them the leverage to buy cryptocurrencies from an exchange with a low price and selling it on another exchange platform that is selling higher.
Data science and blockchain technology can really go hand in hand to increase the confidence that people have in cryptocurrencies as an investment. With a data-driven approach, more people can make sense of the volatility of the cryptocurrency market. In this article, we’d be talking about how to profit from cryptocurrency arbitrage, using data science.
What Is the Crypto Trading Arbitrage?
The pricing of cryptocurrencies varies across various platforms, and some crypto enthusiast, the arbitrage traders, leverage on this to make more profits by buying from cheap exchanges and selling on the expensive ones. In simple terms, arbitrage trading is buying and selling an asset on two different exchange platforms with the aim of making more profit from it immediately.
The same thing is applicable in cryptocurrency exchanges, where you find people who buy cryptocurrency on a platform at a cheap price and then sell it immediately on another platform that is selling that same cryptocurrency at a higher price, in order to gain profit.
How Does It Work?
For instance, if Bitcoin is selling at 1 USD on an exchange and selling at 5 USD on another exchange, as an arbitrage trader, you can make a profit of 4 USD by buying on the cheaper platform and then selling it on the expensive platform to make a profit of 4 USD.
The profitable arbitrage opportunities are very rare opportunities because these exchanges try as much as possible to keep their prices almost the same, in a bid to close any price loopholes for profitable arbitrage opportunities.
Experienced arbitrage traders usually rely on very advanced software that looks out for such rare profitable arbitrage opportunities, and then carries out the trade on behalf of the investor. These opportunities are usually open in exchanges within the same jurisdiction (country) or exchanges that are not in the same jurisdiction.
However, for price differences that arbitrage traders can really profit from without the fear of several currency risks when reverting to fiat currencies, most arbitrage traders usually prefer to trade on platforms within the same jurisdiction.
How to Perform It?
Crypto Trading Arbitrage usually requires a lot of funds in order to really get any reasonable profit from it. That is why you’ll find a lot of “whales” and hedge funds that take over crypto trading arbitrage because they have both the necessary funds and /the strategies to pull off a successful crypto trading arbitrage. If you are not a whale, those who were smart to adopt cryptocurrency earlier than others and now have millions in cryptocurrencies, you might have to consider using a crypto hedge fund.
These crypto hedge funds have access to investments from a pool of investors and are usually more aggressive about profiting from arbitrage opportunities and these are usually done by very experience hedge fund managers who have excellent analytical skills required to make good investment decisions. If you attempt it, you should be aware that the trading fees and the withdrawal fees are likely to eat deep into the profit. Other risks to consider are the transaction time, the transfer time, the possibility of the cryptocurrency market being volatile during the period you’re buying and selling from on one exchange to another.
Once you have calculated all the possible risks involved, and you’re certain about proceeding with cryptocurrency trading arbitrage, the next step would be to find an arbitrage opportunity within an exchange or between different exchanges. For arbitrage between different exchanges, you need to have an account on the exchanges you want to buy and sell on (if you don’t already have an account, then you’d have to register to open one). Then, deposit your preferred amount of fiat currency on one of the platforms (the cheaper one obviously), and buy your preferred cryptocurrency. Transfer the cryptocurrency to the second exchange and sell it for fiat currency, then withdraw your profit.
For arbitrage within an exchange, deposit your preferred amount of fiat currency in your preferred exchange. Buy your first cryptocurrency and then sell. Buy your second cryptocurrency and then sell it again. Buy two to three more cryptocurrencies on the same exchange and sell it. Then the last cryptocurrency you sell, exchange it for fiat currency and withdraw your profit. You can repeat this process as many times until you are satisfied with the profit you have made before the market goes volatile again.
In simple theory, this looks like something that you can easily do and cash out quickly. If this was the case, best believe that no cryptocurrency enthusiast or miner would spend any more time on going the hard way. Rather everyone of them will be lurking around the cryptocurrency market waiting for that opportunity for profitable arbitrage. As mentioned earlier, exchanges too try to close up these loopholes by trying to close up the price differences of each cryptocurrency on their platforms. It is also just not enough to look for these opportunities, you have to be able to calculate the costs and whether or not it would profit you after all these costs have been removed.