Digital assets are proving to be a resilient instrument for investing and portfolio growth, even with the current global backdrop of economic uncertainty. Many economies are undertaking drastic measures to soften the impact of economic slowdown, although there will certainly be challenges, especially for affected industries.
There are, however, many opportunities to gain even amidst the market uncertainties. For example, with arbitrage trading, there will always be opportunities to earn from the margin, as long as different markets have price asymmetry, and for as long as instruments like digital assets, commodities, and even foreign exchange continue to be traded across different markets.
How arbitrage can be leveraged for portfolio growthThere are several ways to grow one’s portfolio from investing and trading. Some will buy assets while the price is low and sell for a profit once prices rise, while some will hold on to their investments for longer-term growth. These strategies come with different risks and liquidity levels. This also applies to different types of instruments, including digital assets.
One way to grow one’s portfolio through digital assets is by arbitrage, which is essentially earning from the margin by buying assets in one market and simultaneously selling it in another market where there are price differences.
Such asymmetry is usually caused by inefficiencies in the market. For instance, with digital assets, different exchanges might use different exchange pricing dependent on trade volume, liquidity, and transaction costs. With commodities, different commodities markets might also have slight variations in pricing. The price difference -- or spread -- between these will result in profit to the trader, for as long as the trade is done while there is still a margin.
How asset management can benefit from technologyInvesting in digital assets can be a daunting task for both experienced and beginner traders. With most markets, the process now involves know-your-customer (KYC) procedures, establishing a digital wallet, choosing asset types, and monitoring one’s portfolio. Meanwhile, arbitrage can also be a time-consuming process, whether it involves digital assets or traditional investments like commodities or foreign exchange. It requires constant monitoring of prices and price differences, as well as being able to find the right timing in making the trades.
Since arbitrage requires keeping track of prices across several markets, technology can play a big part in ensuring easier access to arbitrage in the various markets. “In the world of crypto arbitrage, speed is the critical success factor, ” says Andre Gerald, CEO of Prance Gold Holdings, which is a portfolio management platform that utilizes arbitrage for portfolio growth.
He cites how algorithmic trading and artificial intelligence make arbitrage more accessible to both beginner and experienced investors. Since the price tracking and decision-making process are made near-instantaneously by the algorithm, this approach reduces risk and ensures portfolio growth without much involvement.
Gerald highlights the importance of portfolio management, which takes those with asset holdings to grow their portfolios without actively making trades.
Other benefits from arbitrageArbitrage is merely a strategy used by traders in growing their portfolio from the nuances of the market. This is merely an indicator that there is no price equilibrium in the market. According to studies, arbitrage will eventually improve market conditions by working toward price equilibrium and enhancing liquidity--especially given that other forms of trading will require significant asset holdings in order to gain from price movements.
“[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.”
However, with arbitrage, the presence of application programming interface (API) tools significantly improve access to opportunities, thereby providing investors with the ability to gain from trades without necessarily having the experience and involvement.
“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, ” shares Alexander Opeagbe in a Digital Alpha Research article.
The takeawayAs a form of derivative investment, arbitrage in the various asset and instrument types is not exactly new. However, automation, algorithmic trading, and API access bring a whole new dimension to arbitrage trading. By providing a way to manage assets -- both digital and traditional -- it improves access to the markets, thereby providing new avenues for portfolio growth without the need for expertise or added involvement.
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