I guess the first thing that comes around in your mind would be what is arbitrage?
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. (Wikipedia)
In a nutshell, it’s the simultaneous purchase and sale of an asset to take profit from the price imbalance. A strategy to take advantage of price difference across markets to make the profit.
In a simple way, arbitrage would be: when a particular coin is cheaper on exchange X than on exchange Y, you buy on X, sell on Y, and pocket the difference. Sounds easy enough, right? But in this game, there are quite a number of pitfalls and risks too.
Dawn of a new economy
Today’s gaining popularity of cryptocurrencies is just because of it’s revolutionary properties it possesses. Bitcoin had something that provoked enthusiasm and fascination rather than any other attempt for creating a digital cash system by the mass acceptance of users. Sometimes it’s more like religion than technology.
It’s a digital gold, sound money that is secure from the social influence. Digital money that promises to conserve and increase its value over time. Cryptocurrencies are also a fast and easiest means of payment with a worldwide scope indeed it is a digital cash system without a central entity.
Fact is, many of us are still unaware of cryptocurrency aka Digital Currency. I think its necessary to get more insights about cryptocurrency to crack its potential and opportunities into the daily lives.
Comparison: current money exchange and money exchange through crypto arbitrage
Let’s do a comparison with the current money exchange and money exchange through crypto arbitrage.
For the Crypto Money Transfer consider ethereum (ETH) / LTC from Coinbase (UK) Koinex Exchange (Team Koinex) in India. And for Normal money transfer from GBP to INR through the Western Union (WU) and TransferWise.
If you transfer 1000 GBP through Transfer wise, you’ll be losing 0.28% of your amount as the exchange rates and transaction fee.
If you transfer the same through the Western Union, you’ll be losing 0.53% as transaction fee even though they use better conversion rates for transactions.
Now let’s consider the money exchange over crypto.
If you’re transferring 1000GBP equivalent Ethereum (≈ 2.51ETH) from the UK to India with a transaction fee of 17.45GBP. The amount which is credited to India would be equivalent to 1080GBP (including all the transaction fees and conversion charges). That means 8% of profit.
Another crypto option is transferring 1000GBP equivalent Litecoin (≈ 13.39 LTC) from the UK to India with a transaction fee of 17.45GBP. The amount which is credited to India would be equivalent to 1090GBP (including all the transaction fees and conversion charges). So, now you’ll get 9% of profit.
Note: Calculation is subjected to market changes
Is it worth doing?
Cryptocurrency arbitrage is a positive process. Unlike speculation and margin trading other activities can be viewed as same as the conventional money exchange market. Overall, cryptocurrency arbitrage is an opportunity to make some passive income but at the same time, it has risks.
The amount of arbitrage you can get also depends on the market conditions the rapid price fluctuations will play a vital role in the most arbitrage, for instance, events like the DAO hack. But there is no assured profit by any means. It is very important to understand the potential market risks and the speculative nature of the business.
Future of Cryptocurrency
The market of cryptocurrencies is rapidly gaining attention as it comes with a promise, mostly a big bang to turn the world around. And it will gain legitimacy in the near future as a protocol towards the mainstream for business transactions, micropayments, and will overtake the current money exchange as the preferred tool for global commerce.
Blockchain technology provides the largest benefit with the decentralized exchange, smart contracts, trustless auditing, and color coins.
Cryptocurrencies are here to stay and here to change the world of transactions. Step by step Cryptocurrencies revolution changes the world. And now it’s a good time to accept your payments over crypto for better exchange rates and seamless transactions.
Decide whether you want to stand beside and observe or want to become part of history in the making.
Cryptocurrencies would be the initiator of many emerging systems that will critically change our global economic system.
The future appeal of cryptocurrencies lies in extending the ultimate control over your money with a fast medium for secure global transactions with lower transaction fees when compared to all existing approaches.
With the strong encryption techniques employed throughout the distributed ledger, cryptocurrency gains the public eye into it. As the world is becoming more and more economically unsafe cryptocurrency transaction processes are a safeguard against fraudulent activities and account tampering, and guarantors of consumer privacy.
As it is inefficient and volatile right now, it has a long way to go.
Crypto Arbitrage and its opportunities in international currency exchange was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.