When exploring arbitrage opportunities in the world of cryptocurrency and digital assets, there are numerous way to go about things. One of the least explored options is the loop arbitrage option, even though it can easily net higher profits compared to direct trading. These opportunities, while somewhat more difficult to come by, usually carry a higher individual yield.
The Loop Arbitrage Explained
Unlike a direct or triangular arbitrage trade, loop-based opportunities work in a very different manner. They usually involve the use of just two exchanges, as the initial trade will move away from exchange A to exchange B and then “loop back” to exchange A. That is also where the name itself comes from, as the second leg of this arbitrage opportunity will see funds coming back to where the original arbitrage trade was executed.
It is a Profitable Option?
Every arbitrage opportunity is profitable, by default. Whereas direct arbitrage trading usually results in gains of up to 2%, triangular trading can yield profits of 5-6 %. The loop arbitrage sits somewhere in between first and foremost, although there will be some options which yield even higher profits compared to triangular trading. Those opportunities are somewhat rare, though, especially during this extended bearish market trend.
On average, one can expect to make anywhere from 1.5% to 4% profit per loop arbitrage trade. One interesting example of how such a trade works can be depicted as follows. A user buys EOS on HitBTC, sends the money to Bitfinex where it is converted to ANT (via Bitcoin pairs). That trade would give a profit of up to 1%. When moving the ANT back to HitBTC and selling it for Bitcoin, they can pocket an additional 5.8% profit. This is what makes loop arbitrage so exciting.
Potential Pitfalls to Watch out for
Although the net profit for loop arbitrage opportunities can be quite profitable, there are always two individual “stages” to successfully completing this arbitrage opportunity. It is not uncommon for traders to note a loss during the first “leg”‘ of this trade, as that is always the slightly more risky part. The same can be said for a loss during the second leg, which is also something to be aware of.
That is also one of the downsides to exploring either loop or triangular arbitrage options. It is certainly possible to explore just a part of the entire trade itself, or at least the part that is most profitable. For novice traders, that can be somewhat confusing, even though it really is normal. The main problem right now is coming across worthwhile options to explore, as a bearish market doesn’t necessarily allow for too many opportunities.
Disclaimer: This is not trading or investment advice. The above article is for entertainment and education purposes only. Please do your own research before purchasing or investing into any cryptocurrency.
Image(s): Shutterstock.com