They could also deposit funds on multiple exchanges. For example, Bob spots the price disparities between bitcoin on Coinbase and Kraken and decides to go all in. Reshuffle their portfolios to take advantage of market inefficiencies. At the end of this trade, he still generates the $200 profit and avoids paying withdrawal and deposit fees. So, all he has to do is sell his 1 BTC on Kraken for $45,200 and buy 1 BTC on Coinbase with $45,000 USDT. However, instead of moving funds between the two exchanges, Bob already has funds denominated in tether (USDT) on Coinbase and 1 BTC on Kraken.
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In other words, the most recent price at which a trader buys or sells a digital asset on an exchange is considered the real-time price of that asset on the exchange. The next matched order after this will also determine the next price of the digital asset. For instance, if the order to buy bitcoin for $60,000 is the most recently matched order on an exchange, this price becomes the latest price of bitcoin on the platform. Therefore, price discovery on exchanges is a continuous process of stipulating the market price of a digital asset based on its most recent selling price.
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Note that the price also tends to vary because investor demand for an asset is slightly different on each exchange. Known as an “automated market maker” system, this directly relies on crypto arbitrage traders to keep prices in line with those shown across other exchanges. For example, if someone wished to trade ether (ETH) for link (LINK) they would need to locate an ETH/LINK liquidity pool on the exchange. Decentralized crypto exchanges, however, use a different method for pricing crypto assets. For every crypto trading pair, a separate pool must be created. Here, instead of an order book system where buyers and sellers are matched together to trade crypto assets at a certain price and amount, decentralized exchanges rely on liquidity pools.
What’s more, arbitrage trades aren’t exactly free. To mitigate the risks of incurring losses due to exorbitant fees, arbitrageurs could choose to limit their activities to exchanges with competitive fees. Eat into your profits. 45,900. In other words, the crypto arbitrage trader must have incurred a loss since the potential profit is only $200. Remember that arbitrage trading across two exchanges may incur withdrawal, deposit and trading fees. These fees may accumulate.
The transaction speed of the blockchain: Since you might have to execute cross-exchange transactions, the time it takes to validate such transitions on the blockchain could impact the efficacy of your arbitrage trading strategy. For instance, it takes 10 minutes to one hour to confirm transactions on the Bitcoin blockchain. In that time, the market might have moved against you. Therefore, arbitrageurs should stick to blockchains with high transaction speed; or those that are not susceptible to network congestion. The AML checks of exchanges: It is common for exchanges to undertake anti-money laundering (AML) checks whenever large sums are being moved by a trader.