Daytrading Cryptocurrencies with Multiple Exchanges
In Art of War, Sun Tzu advises to know your opponents so well as to be able to recognize even the slightest weakness and exploit it. One of the main weakness of the cryptocurrency market is that liquidity and trading is fragmented and spread over multiple exchanges. However, you can use this weakness to your advantage if you are able to look at multiple exchanges before you place orders in the market.
Platforms like CoveTrader combine multiple exchanges into one view of the market. For example, look at the consolidated order book of best bids and offers, as well as a list of real-time trades. Bitcoin traders can look at several exchanges at once, including Coinbase, Kraken, Bitstamp, Gemini, and more.
CoveTrader calculates a theoretical price, based on continually assessing the liquidity for $1 million bitcoin for bids and offers across multiple exchanges. You can read more about it here. If a user sees the theoretical price moving up or down, it might be a sign that liquidity in the order book from one or more exchanges might be shifting.
Opportunity for profit
Below is an example from earlier today, approximately 8:54am CST. During a 30 second period, the market begins moving up from 9120 to 9200, over 0.8%. This can be seen from the CoveTrader theoretical value in orange on the plot below. However, we can see that the trades in the market, represented by blue dots, happen to lag this move. If an astute trader was able to notice the market moving up, perhaps they could place orders below the theoretical price on exchanges and trade at a low price right as the market starts moving up.
Which exchanges had profitable opportunities for daytrading?
Using CoveTrader's historical trades widget, and referencing the Diff column, we can see that Kraken trades were being executed below the theoretical price, as the market moved up in the example above. Traders with access to Kraken would have been able to see the market rally, then quickly place bids and potentially be executed.
Then, just seconds later, Kraken and other exchanges are trading at 9180+, for a potential profit over over $60 per bitcoin in just 16 seconds!
If you are daytrading cryptocurrencies like bitcoin, you should be trading across multiple exchanges or at the very least viewing market data from multiple exchanges. While some order books might start reacting quickly to broader market moves, other order books might be lagging and a trader with the right tools might be in a position to profit by being quick to react.