DeutschWhat quickly overwhelms laypersons when choosing the right crypto exchange and trading platform is not only the sometimes serious differences in the selection of digital assets for crypto trading. You will also encounter very different offers when choosing trading instruments. These include brokers who offer contracts for difference (CFDs), futures or options on currencies such as Bitcoin, thus enabling not only the direct purchase of coins. Customers can thus indirectly speculate on the price fluctuations of various cryptocurrencies – and this with a relatively small amount of capital. However, deviating data on fees and prices for crypto trading often lead to confusion. In addition to product selection, trading fees and prices quoted for buying and selling are an elementary factor for the amount of profits or losses booked. But specifically: how do price differences arise on crypto exchanges?
Market for Crypto Coins Has so Far Had a Lot of Freedom of Choice
The first essential reason for the deviations in prices on different crypto exchanges: So far, the market is largely unregulated. Government authorities in many countries are working more slowly than, for example, in Switzerland, where politics is increasingly open to Bitcoin and Co. Without regulations and licensing requirements, there are no controls for exchanges and trading platforms. As a result, operators are free to design their fee models and set their prices. In general, supply and demand determine the development of prices on the crypto market even more than on the stock exchange. However, crypto portals are even freer in their pricing. Although many service providers base their pricing on large analysis portals such as CoinMarketcap.
However, at the latest since reports about the takeover of the platform by the supposedly largest crypto exchange Binance, many observers doubt the independence of the site. Even with other sources, it is not always clear how prices for trading are determined.
How are Prices Determined on Exchanges?
It is therefore all the more important for potential exchange customers to question how objectively and independently prices are determined and set. In addition, since the industry emerged, there have been repeated reports in comparisons and tests about a lack of transparency regarding fees. Experts criticize that some operators show little willingness to explain their system in detail to prospective customers. Even when asked, dubious providers are secretive. It is best to avoid such service providers from the start and instead trust customer-oriented platforms. Before we go into the advantages and disadvantages of the differences in prices, here is another important note: When it comes to fees, you should also pay attention to various possible cost items. Some portals only charge trading fees and waive other costs, such as those that may arise for deposits, but especially for withdrawals from the trading account.
Differences Have a Greater Impact on Small Trading Balances
In particular, “small investors” should pay attention to such fees. If flat amounts are due for withdrawals, often not much is left of the budget in the course of a payout. In addition, some exchanges have mixed calculations, so you have to look even more closely to recognize details. For example, you may have to pay a fixed flat rate per transaction for some currencies and a certain Bitcoin value regardless of the payout amount. The price fluctuations also cause confusion for inexperienced traders, as they always have to recalculate to find out the exact amount of the withdrawal fees in fiat or cryptocurrency. As far as the differences are concerned, you should especially remember that some transactions involve percentage fees, but also flat fees.
Different Billing Variants Make it Difficult to Compare Exchanges
But back to the actual topic of price differences when trading on crypto exchanges. Industry experts often explain the deviations with the different approaches of the participants in the market. Brokers and exchanges often charge the resulting network fees as a fixed amount. High costs can be due to prioritizations in the currency network. A higher priority ensures fast transaction execution, so that timely execution is made possible at prices that are favorable for you. At times – when particularly many traders are active – it can normally take a while for transactions to be completed. This can cause price fluctuations. Realistically speaking, it is the price differences that traders benefit from anyway. On classic stock exchanges, for example, it is only a matter of constantly keeping an eye on the values of individual shares or other assets at a trading venue. So you buy or sell at the right moment.
Crypto Market is Growing and many New Platforms are Advertising for Customers
The crypto market, on the other hand, is growing steadily, and new exchanges are opened regularly. The starting point for price differences is usually also the trading volumes of the providers. The larger the volume in active trading, the better the chances for customers to get investor-friendly prices. Exceptions confirm the rule, of course, because platforms pursue quite different strategies with regard to their own margins. The trading volume of the individual traders is of course also decisive in this context. With large positions, even smaller price differences between different exchanges often pay off, while the effects are of course less serious with small and micro positions. With new competitors on the market, customers can initially trade particularly cheaply with a bit of luck, at least in phases.
Differences in Pricing Pay Off
Basically, thanks to the so-called “Crypto Arbitrage”, you as a trader can explicitly take advantage of the price differences on crypto exchanges. However, getting started won’t work without basic knowledge. Especially some analytical skill is needed as a basis for success. Because this trading approach is not without risk. The term “arbitrage” means nothing other than that market participants consciously exploit price and price differences on different (crypto) exchanges or trading markets in order to achieve returns. This way is also popular with speculating in interest rate transactions. In order to turn differences to your advantage, however, you inevitably need several exchange accounts.
Learn about Trading with Price Differences without Risk?
As far as experience and expertise are concerned, demo accounts can be effective. At many brokers and exchanges, you can learn about Bitcoin trading or buying and selling altcoins such as Ethereum risk-free, at least for a certain period of time. This way, you won’t incur high financial losses right in the first test phase because you lack know-how so far. You often get a certain starting capital that is available for a period X in the test account for playful crypto trading. Only after the test phase is the first deposit required for “real” trading.
Execution Speed Can be Decisive
An essential success criterion when speculating on price differences on exchanges is the time factor. Therefore, speculating using fiat money such as euros or US dollars is often not very promising. Because the additional money transfer (beyond wallet and crypto account balances) by bank transfer takes too much time, so that price advantages have long since disappeared by the time the credit is made. Since accounts are needed at several exchanges, the transaction fees already mentioned play a central role. It is therefore necessary to pay attention to possibly significantly different fee models, as they have an overall impact on later profits – or on losses, which can of course also result from incorrect decisions and dramatic price changes. You need to know exactly the costs of transferring the coin holdings between the involved exchanges in order to make the right decisions.
Trading on Leading Portals is Often Particularly Fast
Similar to the bank transfers mentioned, it can sometimes take a while for coins and tokens to be moved from one account to another and be available on the target account for sales at a better price. Here, last but not least, the size of the exchange is once again important, because the dominant providers on the global market for crypto trading often literally set the pace. At least that is what many traders’ experiences show, although this is a generally valid and irrefutable rule. Too long transfer times can lead to prices changing in the meantime, so that the result deviates massively from the intended one. Above, we have already pointed out the influence of trading volume on the return potential. The second relevant factor is of course the price difference itself, which becomes apparent when comparing different exchanges.
Trading Volume Determines Price Differences on Crypto Exchanges
The actual procedure is then as logical as it is obvious, but requires you to constantly analyze the market and exchange situation. Because conditions can change quickly. An exchange that has been particularly favorable so far may no longer be the best for shopping at a later point in time, while particularly good conditions for purchasing are tempting elsewhere. It is also important here that you compare possible differences in several currencies. Exchange A may be the top address for buying Bitcoin, while Exchange B is the top address for Ethereum purchases. You are probably looking in vain for the one perfect solution for buying crypto overall. So you have to keep track, especially because of possible rising or falling prices during your trading interval on the participating markets/exchanges. The number of traders during a day on a platform can cause sometimes significant movements.
Prices Only Move when Traders are Active
A key incentive for trading involving price differences on crypto exchanges is also the fact that you can of course not only buy Bitcoins on exchange A and later exchange them into your fiat currency after the transfer to exchange B. The advantage of this trading approach is that you can exchange digital currencies for each other by exploiting the different price levels. Precisely because this works faster than, say, changing into dollars via the bank account. In order for arbitrage trading to work, the market volume on both participating exchanges must generally “be right”. Especially when selling, it must be possible for you to exchange your desired amount of coins into the target currency. For the latter, in turn, there must be an offer on the second exchange that matches the position.
Increasing Experience Creates Security & Market Understanding
If speculating on price differences may sound a bit confusing at first, trading based on crypto arbitrage is not that difficult upon closer inspection and with increasing practice. An elementary aspect for success is a sense for the volatility, i.e. the fluctuation range of the crypto market and the countless currencies that come into consideration. Those who understand the fluctuations as an opportunity can make considerable profits through the enormous price differences through the many different exchanges with their self-selected prices. Opportunities also arise in the area of day trading. Healthy risk management is the be-all and end-all here, as with crypto trading as a whole.
Keeping Foreign Currency on Exchanges as a Risk?
For the sake of completeness, one risk should not be concealed. Media repeatedly report on hacker attacks on exchanges, in which sometimes very large damages occur in the “event of success”. In order to successfully speculate on price differences on exchanges, you must keep your crypto capital on exchange-internal accounts. So your money is also threatened by hacker attacks. Due to the lack of regulation of the market, there is no security at many providers. It is worth comparing here, because some exchanges now guarantee their customers hedging mechanisms if damages can be attributed to errors of the company. You can minimize the risk of theft by using external wallets. However, it may then take a little longer for funds to be sent from the digital wallet to platform A and from there to exchange B. Time that you don’t always have when trading – especially when it comes to price differences on crypto exchanges and every second and minute counts.
Betting on Price Differences on Crypto Exchanges also Possible Automatically
All in all, you can achieve very impressive returns with this trading concept by comparing transaction costs and account fees, as well as with a constant look at the market and the price differences. The necessary analytical instinct comes with time. A proven tool can be so-called bots, which automatically track price movements and differences on your behalf. Such software can be tested free of charge or even used permanently at some brokers and exchanges.
By the way:
Finally, a special way of trading via price differences on crypto exchanges should be pointed out. In some places you will encounter the term “Triangle” in this context. Here you include three currencies in the trade – for example, you can mutually exchange two fiat currencies and one digital currency or two crypto coins and the US dollar in order to ideally earn twice from price movements. There are several other arbitrage variants that should not be discussed further at this point.
