Businesses today face economic challenges with the uncertainty brought about by drastic shifts in consumer demand. Social distancing, shelter-at-home, and other similar policies have resulted in limited business operations in many industries. This has led to opportunities for entrepreneurs, investors, and individuals to find innovative ways to adjust and even thrive.
The capital markets have not been immune to the recent global shocks, although there are still derivatives and instruments available for investors to leverage as risk-free investments. For example, the volume of trades on digital asset exchanges still remains steady and even growing — amounting to $118 trillion within a 24-hour period as of April 2020. This opens a window for investors and traders to continue with their economic activity, while the rest of the world is only starting to adjust to increased digitalization.
Arbitrage and the potential for portfolio growth
Arbitrage is the process of making simultaneous or near-simultaneous trades on different exchanges or markets to take advantage of price asymmetries. This will result in some earnings from the margin or spread. If an asset is cheaper in one exchange than another, then a trader can simply buy the asset at the cheaper exchange and simultaneously sell it at a higher price in the other.
This can be done for different asset classes, such as cryptocurrency, foreign exchange, commodities, or any other security that can be traded or exchanged. “Cryptocurrency markets exhibit periods of large, recurrent arbitrage opportunities across exchanges,” writes Igor Makarov of the London School of Economics & Political Science and Antoinette Schoar of the Massachusetts Institute of Technology (MIT) – Sloan School of Management. In a published research paper, they explain how such opportunities exist between cryptocurrencies across different exchanges and across different jurisdictions.
There are also variations of arbitrage, wherein a triangular arbitrage, for instance, involves trade in three different markets or commodity types, thus taking advantage of the price differences on each of these.
While arbitrage is commonly done on securities and instruments, traders can also arbitrage on other things, such as risk, commonly known as risk arbitrage or statistical arbitrage. This essentially involves leveraging on speculation, such as a foreseen price change after some activity like a merger or acquisition.
Even in its most basic form, arbitrage will require expertise, skill, and access to technologies that provide up-to-the-second news and execution of trades. Thus, while it can be viable for both retail and institutional arbitrage, it is generally not considered a solution for investors with little to no experience in this activity.
Technology solutions for portfolio management
One of the biggest challenges in investing in cryptocurrency is volatility, especially on the impact of market shocks. However, cryptocurrency values generally adjust toward stability in the long-run, thus some investors choose to hold on to their digital assets. This reduces liquidity, however, since one’s value is locked into the specific crypto asset. Thus, there is a benefit to making these holdings work toward portfolio growth through asset management.
Therein comes the emergence of portfolio management platforms that utilize data and AI-driven automation in executive arbitrages. By engaging in trades, such platforms drive volume into exchanges and likewise enhance liquidity. “Today, there are thousands of exchanges in the markets. None of these exchanges want to be seen as weak, slow, or inadequate,” says Tony Jackson, Chief Executive Officer of Jubilee Ace, an AI-driven arbitrage platform.
He adds that arbitrage can help these exchanges in two ways: “Firstly, by increasing the liquidity by trading actively on their exchanges, and secondly, by closing these pricing gaps between the exchanges. They get their trading fees, we get our spreads, our users get a portion of our profits.” He says that this is a holistic and balanced model for all parties involved.
Automation enables traders and cryptocurrency holders to put their assets into work without necessarily needing the expertise and equipment for arbitrage trading. With short lock-in periods, investing through asset management firms like Jubilee Ace means liquidity is assured.
Low-risk and highly-flexible
As a method of trading, arbitrage is flexible in that there is no limit to the type of asset, instrument, or commodity that can be arbitraged. This can even be done with retail assets, such as by buying any retail commodity and simultaneously selling it for profit for as long as there is price discrepancy.
There is merit to using portfolio management platforms in leveraging one’s asset holdings amidst economic uncertainty. With the use of data analysis, AI, and automation, investing can be simplified for both beginner and advanced traders. This could be one way through which industries can effectively weather a recession.
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