One trading approach with more potential in cryptocurrency than traditional finance is arbitrage trading. This is because the crypto market is highly volatile compared to traditional financial markets. Crypto asset prices tend to deviate significantly both over time and between trading venues. Because crypto assets are traded globally 24/7 across hundreds of exchanges, there are far more opportunities for arbitrage traders to find profitable price discrepancies. This is a popular strategy with hedge fund managers.
Examples of crypto arbitrage trading strategies
There are many arbitrage strategies available in the crypto market:
Spatial or Cross-exchange arbitrage: This is the simplest form of arbitrage trading. With this strategy, a trader looks to take advantage of the difference in the price of an asset across two centralized exchanges (e.g. buying Bitcoin on Coinbase and selling it on Binance).
Decentralized arbitrage: Decentralized arbitrage is similar to cross-exchange arbitrage but involves a decentralized exchange (DEX) instead of two centralized exchanges. These arbitrage opportunities are created when the price of a traded pair on a DEX is different from the spot price on a centralized exchange.
Triangular arbitrage: Instead of capitalizing on the price difference for one asset across exchanges, triangular arbitrage takes advantage of the price difference between multiple cryptocurrencies. In some cases, the trader may end up with the same asset they started with. A trade where Bitcoin is exchanged for Ethereum that’s then exchanged for Solana that’s then exchanged for Bitcoin is an example of triangular arbitrage.
Cross-asset arbitrage: This strategy looks for arbitrage opportunities between derivatives like options and futures contracts and their underlying assets.
Statistical arbitrage: Statistical arbitrage uses mathematical and statistical models to execute trades algorithmically. This is a high-frequency trading strategy that relies on using a high volume of trades to generate significant profits from otherwise insignificant price differences. Trades can be cross-exchange or cross-asset.
The main risk in arbitrage trading
The main risk when making arbitrage trades is execution risk. This is the risk that the price of the asset traded will change in an unfavorable direction while the trade is being executed, turning a positive arbitrage opportunity into a money losing trade. In some cases, prices can change unfavorably in mere milliseconds, making every moment count, especially when using statistical arbitrage or other algorithmic trading strategies. Execution risk is one of the reasons institutions invest significant capital in high-frequency trading equipment and infrastructure.
What do you need for crypto arbitrage trading?
Many hedge funds are looking to expand their arbitrage strategies to included digital assets. Their real-time, high frequency, high volume trading requires a large amount of data to support the development and backtesting of their digital asset algorithmic/programmatic trading strategies. Effectively identifying opportunities and developing the necessary trading algorithms is impossible without comprehensive data from the major crypto exchanges and blockchains.
Without comprehensive, granular and unopinionated data, hedge funds cannot enter the digital asset space. Amberdata eliminates the infrastructure setup and maintenance required to obtain digital asset data and is the leading provider of crypto data for institutional investors. We provide blockchain, DeFi, and market data with 24/7 reliability in formats familiar to trading teams. Request a demo today to learn how our platform can help you succeed with crypto arbitrage and other digital asset strategies.
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