How can investors seek and earn from arbitrage opportunities in a volatile market filled with collapses?

Abstract

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• Though the CPI is lower than what’s expected, which has temporarily boosted Bitcoin and the US stock market, we may still be mired in a bear market.
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• It is particularly vital that we grasp our wealth code and find a relatively reliable and stable way to make profits in such a treacherous crypto market.
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• Though pessimistic in a bear market, most investors are still seeking investment products with lower risks and moderate returns.
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• It will take some time for the market to walk out of the chain of crises and offset them. Then, it will be able to bottom out and go up. Subsequently, deleveraging will follow, ushering in a more transparent market running in a sound way.

The article:

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Though the CPI is lower than what’s expected, which has temporarily boosted Bitcoin and the US stock market, we may still be mired in a bear market.

After all, people often show higher FOMO sentiment in a bear market which could lead to more frequent spikes in price. The daily surge often indicates that everything will not perform as you expected. The bear market generally lasts till investors completely "surrender".

Since the beginning of this year, people seem less willing to make investments under the great impact made by the Federal Reserve which raised the interest rate. The last major shuffle in the crypto space occurred in May when the TerraUSD stablecoin and Terra (LUNA) crashed.

In November, the crypto market has seen one after another collapse, especially the FTX incident which triggered a huge “tsunami” effect, bringing down multiple crypto platforms and investment institutions.

The effect of the FTX incident is far more far-reaching than that of LUNA and 3AC incidents. Since many American users’ funds are backlogged in FTX, it can be foreseen that the SEC will definitely impose stricter supervision on the crypto market.

Sam Bankman Fried (SBF) proclaimed himself as the savior of the industry in old days. However, all assets he managed went down to almost zero overnight. We can learn that it is necessary to create more regulatory norms for the crypto space and make it more transparent.

Arbitrage Guide in a Bear Market

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It seems that the current market has woken up overnight, realizing the importance of proof of reserves for exchanges, and how to ensure the safe and stable appreciation of user assets.

It is particularly vital that we grasp our wealth code and find a relatively reliable and stable way to make profits in such a treacherous crypto market. Next, a few simple ways to seek and earn from arbitrage opportunities will be presented. These are for reference only:

1. Spread arbitrage

Spread arbitrage is a way to earn spreads by transferring a cryptocurrency/fiat currency trading pair. Though what can be earned with this method has dropped a lot today and it may not be feasible, it is a simple way with the lowest risk, which has attracted many investors to rush to seize this rare arbitrage opportunity. You can follow the steps below to conduct spread arbitrage trade.

1. Sign up and complete KYC with 3-5 different cryptocurrency exchanges
2. Hold currencies that you want to transfer in more than 2 exchanges
3. Hold a stablecoin equivalent to the currencies to be transferred in the same exchange
4. Place a buy order and a sell order at the same time when there is a price difference in different exchanges


It should be noted here that, with this method, one can actually get profits if he/she owns a certain amount of funds on the two exchanges where a spread occurs, and place a buy order and a sell order at the same time, so that the position is in a hedging state, rather than buying a currency first and then transferring it to another exchange to sell. In addition, the above-mentioned profits include handling fees to be deducted, so it is suggested that you trade when there are discounts on fees to maximize profits.

However, the chance to earn from spread arbitrage is slim. The above-mentioned method is for reference only. After all, you have to do your own research.


2. Spot-Futures Arbitrage

Spot-futures arbitrage refers to arbitrage based on the price difference between the futures contract and the spot on the cryptocurrency exchange.

In general, the futures price represents the future trend of the spot price, and the price of the futures contract will converge with the spot price on the expiration date of the futures. However, before the delivery time, there may be a basis between the price of futures and the spot price. The basis refers to the difference between the spot price and the futures price. Once the basis grows large, there will be an arbitrage opportunity.

Spot-futures arbitrage mainly includes forward-basis arbitrage and reverse-basis arbitrage.

The forward-basis arbitrage means that the arbitrageur can sell the futures contract and buy the same amount of spot at the same time to establish an arbitrage position when the spot price is lower than the futures contract price, and close the futures contract and sell the corresponding spot to make a profit when the gap between spot and futures prices tend to be the same (not necessarily on the expiration date of the futures contract).

The reverse-basis arbitrage is the opposite: arbitrageurs can buy the futures contract and sell the same amount of spot at the same time to establish an arbitrage position when the spot price is higher than the futures contract price, and close the positions at the same time to make a profit when the spot price is higher than the price of the futures contract.

Theoretically, it is easier to make profits from the spot-futures arbitrage, but in reality, there are multiple risks and uncertainties in practice.

First, the basis between the futures price and the spot price is changing all the time and could grow larger at certain moments due to market price fluctuations. This way, users will lose money on the futures and spot goods they hold. Therefore, it is particularly critical for users to spot the timing of opening a position and make follow-up judgments of the market in the spot-futures arbitrage.

Second, the futures contracts involved in the spot-futures arbitrage have the risk of liquidation. Even if the leverage of the futures contract in the spot-futures arbitrage is set low, users’ contracts are still at risk of liquidation because of price spikes that occurred on some individual exchanges.

All in all, the spot-futures arbitrage is not suitable for newbies and it has a high technical threshold that requires a relatively accurate judgment on market trends. If a user does not develop or strictly adhere to a risk management strategy, he/she can suffer catastrophic losses, as we have seen many times in financial history.

3. IPO arbitrage

After a currency goes live on an exchange, the demand for it will increase in the initial listing stage. Accordingly, its value will gradually rise. At this time, holders may sell it at a relatively high price to earn the spread. We called this IPO arbitrage.

Gate.io has an exclusive listing of many cryptocurrencies which can be found at Gate Startup, Gate.io's IEO platform.

4. Other suggestions

Trying to buy the dip in a bear market can be very risky if you don’t have extensive market experience. A bear market is often slow in demonstrating its trends, thus unpredictable and making it difficult for users to decide exactly when to invest.

Bear markets in traditional asset markets take an average of 287 days to go through a peak-to-trough decline, according to statistical analysis. In some cases, digital asset markets are much more volatile than traditional markets. Therefore, users may miss lots of opportunities if they try to predict the market activity and enter at an ideal price.

However, there is still a very effective strategy, that’s, making fixed investments in a regular way, which is suitable for a bear market in both traditional and digital asset markets. Making fixed investments regularly means purchasing small amounts of assets at regular intervals, such as daily, weekly, or monthly.

This approach allows investors to gradually increase their holdings of a specific asset without buying a large amount at a single price during a bear market, thereby avoiding possible heavy losses. It is able to minimize the impact of volatility because investors can schedule purchases at a specific price or within a specific period of time.

Making fixed investments regularly in a bear market is a stable strategy for investors. We can also regard it as a means of "arbitrage" in the long run, which helps minimize the risk of volatility at the same time.

Long-term holding or Hodl&Earn

Hold for a long time or hodl&earn? Different people may make different choices. However, it is true that when you hold for a long time, you will not face the risk of short-term fluctuations, which may exert an adverse effect on your funds. On the contrary, being a HODLer means buying and holding cryptocurrencies rather than selling them. Perhaps this is also a safer approach than other proactive strategies.

Over time, the value of cryptocurrencies will soar, and some coins can even reach a high price that you cannot imagine, which is why choosing long-term holding tokens is also a sound business strategy.

Please be aware that the market is highly volatile. Long-term holding in a market where price changes in a short period of time can have terrible consequences, and you need to accept it.

So, are there any financial tools on the market that can allow users to see a glimmer of the bear market?

Though pessimistic in a bear market, most investors are still seeking investment products with lower risks and moderate returns, such as Gate.io’s Lend & Earn products.

Gate.io Lend & Earn products have a low investment threshold. Users can start with a low amount and deposit and redeem assets anytime. With hundreds of token assets to choose from, Lend & Earn will help users match idle assets with users who have borrowing needs, fully utilizing user assets and improving asset use efficiency.

When using Lend&Earn products, users can customize lending rates and deposit and redeem assets at any time after successful lending. For funds that fail to lend, the redemption can be done immediately. Successful lenders will enjoy interest on the hour which will arrive at the next full hour after redemption.

After upgrades, Gate.io Lend & Earn liberalized interest rates, replacing the original interest rate rules with the bidding interest rate rules. This will expand the loan amount several times. Moreover, interests are calculated on the hour instead of on the day. It also allows users to lend manually. Gate.io offers you a guaranteed turn. You can lend on the platform in a secure way.

In the long run, you may earn more by lending to "provide liquidity" to the market than "HODL", yet it is not always the case. You can also configure your investment portfolio in a more reasonable way according to your own risk appetite and your views on the trend of the market.

Conclusion

Fear often dominates the market whenever it is in a bearish trend. As a result, pessimism continues to spread through the market and grows more serious as the market continues to fall.

But let’s not panic. It will take some time for the market to walk out of the chain of crises and offset them. Then, it will be able to bottom out and go up. After stress testing, deleveraging will follow, ushering in a more transparent market running in a sound way.

Spring is not far away and will finally come when the flowers start to bloom. It is the same with the crypto market which will surely recover and get better!



Disclaimer
Author: Gate.io Researcher: Byron B.; Translator: Cedar W.
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.