Even during trying times, digital assets have been proven to be a valuable asset. While most traders scare away from trading during economic downtrends, these times can actually bring more opportunity especially if the right trading strategies are employed. Traders can still grow their portfolio during tough economic times.
One strategy traders can use is hedging, This is a reasonable practice especially during recessions. However, this strategy won’t increase your profitability but it will minimize any potential losses. For traders who are trying to increase their profits, one strategy that can be taken advantage of is arbitrage. It is a strategy that takes advantage of price discrepancies across different markets and uses it as an opportunity to gain profits. Traders can use this strategy to the most assets but are more profitable with commodities and digital assets.
Growing Digital Assets with Arbitrage
As its simplest, arbitrage trading is the concurrent buying and selling of the same asset in different exchanges. Due to the increasing number of exchanges, instances of asset mispricing are highly probably in different exchanges. This is because of demand, locale, and exchange rates.
“The main purpose of arbitrage is to maximize investors’ profits, based on their assets, with zero risks.” To fully realize the potential of this strategy, traders must have the right equipment and knowledge,” according to the Journal of International Studies.
Traders can grow their assets through arbitrage by taking advantage of pricing gaps caused by market inefficiencies across different exchanges. Through these gaps, traders can earn profits. The continuous increase of exchanges globally is one of the reasons why market mispricing arises in these exchanges. This creates arbitrage opportunities which lead to profitability.
Increasing Profitability Through Tech-Driven Arbitrage
“In the world of arbitrage, speed is the critical success factor,” says Andre Gerald, CEO of Prance Gold Holdings, an automated arbitrage trading platform. Through the use of technology through algorithms and artificial intelligence, traders can now increase their profitability when arbitrage trading. “In digital assets where speed is of the essence, technological advancement has ensured that all arbitrage trading is executed successfully within seconds,” Gerald added.
Because of technology, anyone can now easily profit using arbitrage. Unlike before when people do it manually, it takes a lot of their time simply by just studying and comparing these different exchanges waiting for opportunities to arise. Since no human can keepblo up with all the arbitrage opportunities, tech-driven arbitrage was made to catch all these contingencies.
Tech-driven arbitrage uses application programming interface (API) tools to significantly improve access to opportunities, by giving the ability for traders to gain profits even without direct involvement in the trades. “What these programs do is to initiate a trade instantly once an arbitrage opportunity is spotted. For instance, our technology offers traders reduced risks and increased profitability of their digital assets”, explains Jeffrey Guo, Fintech Veteran, and Seed Investor of Prance Gold Holdings.
“Derivatives, when used correctly, offer a way to hedge investments and manage risk. It is widely known that many institutional investors will not even consider entering the space unless they have these tools,” explained by Alexander Opeagbe in a Digital Alpha Research article. Other than increasing the profitability of digital assets, tech-driven arbitrage also drives improvement in market inefficiencies.
Helping Market Inefficiencies With Arbitrage Trading
“[I]ncrease in arbitrage activity is associated with a reduction in market order imbalance and an improvement in liquidity, ” says Dominik Rösch, a researcher at State University New York-Buffalo in a research seminar series. “Overall, these findings indicate that arbitrageurs tend to trade against market order imbalance and thus enhance market integration and liquidity.”
Arbitrage trading is possible due to market inefficiencies but this strategy can actually help improve these inefficiencies. With the use of arbitrage, exchanges can now be aware that there is a pricing gap in the market. Studies have shown that through arbitrage trading, pricing discrepancies are closed by initiating trades. This also leads to enhancing the liquidity of markets.
When growing your digital assets, there are different strategies you can take advantage of. Arbitrage isn’t an exactly new strategy, but it is still deemed as a viable option in increasing profitability especially when used with advanced technologies like artificial intelligence and algorithms. Tech-driven arbitrage doesn’t only increase your profits, it also helps in closing market inefficiencies.