Cryptocurrency arbitrage basically can be said to be the act and the practice of investors or traders buying a token or cryptocurrency on one exchange and selling it on another or a different exchange at a higher price then he or she is able to make profit from the price difference.
I would say that this type or strategy of making profit from the cryptocurrency market is basically wise and does not need or require to much knowledge about cryptocurrency market trading however, this strategy still has to do with cryptocurrency therefore it is open to significant risks, risk that an investor should understand before starting or embarking on it.
In this post of mine I am going to be helping you all my readers understand some of the risk involved in cryptocurrency arbitrage by basically explaining and discussing these risks, to be previse I will be taking four; cryptocurrency market volatility, liquidity issues, transaction delays and regulatory risks.
- CRYPTOCURRENCY MARKET VOLATILITY
The most significant risk in which investors and traders will face when embarking on cryptocurrency arbitrage trading is as a result of one fundamental feature of the cryptocurrency market and that is volatility, as a result of market volatility prices of tokens and cryptocurrencies can change rapidly moving unpredictably.
The rapid changes in price of the cryptocurrency can favour some and cause others significant and great financial losses and to the arbitrage trader, the volatility of the market can eliminate price difference between exchanges making the trader not able to realize profit or even worse, face financial loss.
Additionally, this risk only increases and is more drastic the higher the cryptocurrency market increases in volatility, where by prices in most cryptocurrency and tokens in all exchanges experiences intense price swings occuring in a short periods of time and as a result leaving the trader unable to predict and decide which token and cryptocurrency to capitalize on so as to make profit from the price discrepancies.
- LIQUIDITY ISSUES
Another issue, challenge and risk facing cryptocurrency is as low liquidity this, is also one of the risk cryptocurrency arbitrage traders must deal with, liquidity first of all basically could be said to be, or refers to how easily an asset well in this case token or cryptocurrency can be bought or sold in a cryptocurrency market without having or causing changes to its price.
Therefore the lack of adequate liquidity in the cryptocurrency market basically prevents cryptocurrency arbitrage traders from buying or selling as much tokens or cryptocurrency so as to maximize profit, the issues that arises as a result of this inadequate liquidity is mostly experienced when dealing with small exchanges that are unable to process large volume transactions.
- TRANSACTION DELAYS
Transaction delays is another risk that is to be faced by cryptocurrency arbitrage traders, transaction delays arises or is caused when a cryptocurrency or blockchain network becomes congested with transaction request and as a result creating a queue of transactions that are to processed and executed on the blockchain network.
For a trader or investor dealing in cryptocurrency arbitrage time is of the essence and an important factor that determines if profit will be made and how much or if loss will be incured owing to the volatile nature of the cryptocurrency market therefore transaction delays can pose a significant risk,
whereby a user who wants to buy at the lowest price possible or sell at a high price is made to wait or has his transaction delayed hence, he will loose or miss out on the time frame where the cryptocurrency reaches its profitable and most profitable points and prices.
- REGULATORY RISK
The regulatory structure and guidelines regarding or concerning cryptocurrencies is constantly evolving and as unpredictable as the cryptocurrency market and just the same way traders and investors suffer the effects and risks of the unpredictable nature of the cryptocurrency market, they will also suffer the risk and effect of the uncertainty of regulatory guidelines for cryptocurrency.
Therefore traders and investors who are involved in cryptocurrency arbitrage trading face the risk of the government and their regulatory bodies suddenly imposing rules and guidelines that restricts them from trading cryptocurrency with very severe legal consequences or repercussions for anyone found guilty.
Additionally the risk can also be in the form of a change or introduction of taxes that basically affects the profits of the cryptocurrency arbitrage trader, traders who wants to embark or arbitrage trading must therefore be vigilant of cryptocurrency exchanges and their history with government and regulatory bodies.
In conclusion, this post which I have written in this great community basically has to do with the risks that is surrounding cryptocurrency arbitrage and I was able to discuss and explain for of those risks each of them in a subheading I hope you enjoy reading and going through this post and let before hand say thank you very much.