Know about intraday and arbitrage trading in cryptocurrency

The stock markets will generate high returns when you invest for the long term. But one can also earn quick returns in the short-term through some investment strategies, such as intraday trading and arbitrage trading. 

Latest updates – Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.
2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

Union Budget 2022 Outcome:

1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.
3. Loss from digital assets cannot be set-off against any other income.
4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

What is intraday trading?

Intraday trading, also called day trading, is one of the trading strategies used in both the stock and crypto market. It means buying and selling stocks/cryptocurrency on the same day. The purpose behind intraday trading is to reap benefits by price movements during the same trading day, i.e. before the market closes. However, the investor does not get ownership of the stocks in intraday trading. A person can do intraday trading through online trading platforms. 

Intraday trading in cryptocurrency

Day trading in cryptocurrency is similar to traditional intraday trading. The liquid and volatile nature of the cryptocurrency can easily enable day trading of crypto assets. There are several crypto trading platforms. However, it is essential to ensure that you invest in a trusted cryptocurrency trading platform. It should offer a safe and transparent trading environment along with heaps of crypto markets, including selecting crypto-cross and crypto-to-fiat pairs and low commissions.

What are crypto trading pairs?

Crypto trading slightly differs from trading in stocks or commodities. Buying and selling shares in the stock market involves money transactions, whereas buying and selling in cryptos involves two different forms, i.e., crypto-to-fiat or crypto-to-crypto.

Crypto-to-fiat means trading of crypto in exchange for native fiat currency. For example, BTC/USD. It means you can buy Bitcoin in exchange for USD. 

However, crypto-to-crypto means trading of crypto in exchange for another crypto. For example, LTC/BTC. It means if you already own Bitcoin (BTC), you can exchange BTC with Litecoin (LTC) for an equivalent value.

Is it possible to make profits from day trading in crypto?

The value of crypto assets is unstable. The prices change in minutes or even in seconds. Compared to traders of intraday trading, crypto traders need to give more time for technical analysis and price movements. Hence, a minute change in the market situation can have a massive impact on the value of your assets.

What is arbitrage trading?

Arbitrage is a technique of gaining from differences in the price of crypto in different markets. The arbitrage opportunity in crypto arises due to no established common way to price the cryptos. Since there are hundreds of platforms for crypto day trading, the arbitrage opportunities are boundless. 

Some of the popular cryptocurrencies with high trading volumes, such as bitcoins, require lots of collateral. Hence moving money across the exchanges can be inefficient, making it hard for traders to arbitrage differences. Therefore, these price differences may persist for longer than they would in a more efficient market.

However, the crypto market can give you more frequent arbitrage opportunities as compared to traditional intraday trading.

How does arbitrage trading work?

Let us understand with an example of arbitrage trading-

If the price of a crypto asset UVW varies on two exchanges, a trader can buy the crypto asset on one exchange at a cheaper rate and sell it on the other exchange at a higher price. 

What are the challenges for an arbitrageur?

During times of high network congestion, transferring a crypto asset from one exchange to another would be difficult. To generate high profits from a single arbitrage opportunity, the arbitrageurs have to execute large trades.

The crypto traders are very much exposed to risk because they need to hold crypto assets in wallets provided by crypto exchanges.

Low-volume exchanges taking several minutes for trade cannot support an arbitrageur in a highly volatile market.

Conclusion

Intraday and arbitrage trading in crypto is highly risky, one major factor being the lack of improved infrastructure. Hence, it is always recommended to research before investing in the crypto market.

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