It is well known that every industry has its own specialized terminology. Although the same words may exist in the same industry, their meanings can differ somewhat. For example, the term "炒币" (speculating on cryptocurrencies) used to refer to speculating on physical currencies, but now it refers to speculating on digital currencies. This shows that for investors to fully understand an investment project, they need to be familiar with the specialized terms used in that project. The term mentioned in this article is "Bitcoin arbitrage," which may be unfamiliar to most investors. So, what does Bitcoin arbitrage mean? Below, I will explain it in simple terms.
OKX_ Global Digital Currency Trading Platform. Click the link below to register on the OKX exchange's official website and receive a blind box reward of 10,000 USDT!
OKX registration link: https://www.okx.com/join/OK234
Huobi / Binance / OKX Android APP download: https://688li.com/
Binance registration link: https://www.binance.com/zh-CN/join?ref=587926281
What does Bitcoin arbitrage mean? What methods are used for Bitcoin arbitrage?
What does Bitcoin arbitrage mean?
Arbitrage trading primarily involves exploiting price imbalances between multiple markets to gain profit from the buy-sell spread, commonly referred to as "搬砖" (moving bricks) in the cryptocurrency community.
For example, if a tech company's stock is priced at $35 on the New York Stock Exchange and $35.10 in London, the difference is small. However, quickly buying a large amount of stock at the lower price and selling it at the higher price can yield substantial profits for arbitrage traders. Compared to other trading strategies, it carries lower risk.
Arbitrage can occur in various financial markets beyond stocks, including the digital currency market.
For instance, imagine a drunk man walking a dog (assuming he doesn't lose the leash). The man's walking is random, and the dog's walking is also random, but the distance between the man and the dog fluctuates between 0 and the length of the leash. In the context of Bitcoin, there are several exchanges in China, each with constantly changing prices, but the price difference between two exchanges remains stable. As shown in the diagram, we monitor the price difference between two exchanges and use statistical methods to check if the difference exceeds a reasonable fluctuation range. When it does, we sell at the higher-priced exchange and buy at the lower-priced exchange. When the price difference reverses, we take the opportunity to perform the opposite operation.
What methods are used for Bitcoin arbitrage?
Let's look at three methods of arbitrage: spatial, cross-border, and statistical data.
Spatial arbitrage involves taking advantage of different quotes at two different exchanges. Exchange A might offer BTC at $9,500, while Exchange B's price could be $9,850. Traders can profit from this $350 difference by buying from Exchange A and selling on Exchange B. Given the decentralized nature of the digital currency market, such price differences may occur more frequently than people realize.
Cross-border arbitrage is a similar concept, but the main difference is that the two exchanges involved are in different countries/regions. It is worth noting that this particular trading strategy may be difficult to implement because the premium arises from consumers in high-price countries being unable to access international market exchange rates themselves.
Finally, there is statistical data arbitrage. This is a high-tech strategy that typically involves mathematical modeling. It carries higher risks than other techniques because it may involve using trading algorithms that can only exploit pricing differences that exist for a very short time.
It is well known that liquidity risk is fundamentally unavoidable for arbitrageurs. Statistics estimate that currently, between 2.78 million to 3.79 million Bitcoins have permanently disappeared, with approximately 14 million remaining. Due to severe reluctance to sell, trading frequency is low, with only about 960,000 actively traded, representing less than $20 billion in liquidity. The small market capacity and insufficient supply make it challenging for arbitrageurs to buy the desired Bitcoins at expected prices based on arbitrage needs, and they sometimes also face counterparty risks from spot exchanges.
This concludes the detailed explanation of what Bitcoin arbitrage means and what methods are used for Bitcoin arbitrage.