Arbitrage is an economics term. It defines the transaction performed on an asset in order to provide risk-free profit by taking advantage of the price differences between the markets.
What is Arbitrage?
Arbitrage, which is an economic term, is a financial transaction where the same valued asset is bought and sold in two separate markets to take advantage of price differences. Arbitrage transaction, based on the logic of making a risk-free profit, is the simultaneous sale of the asset in the market where it is priced lower and sold in the market where it is priced higher. The said assets; currency, stocks, precious metals such as gold, silver or cryptocurrencies. It is generally assumed that the price of the same related asset is equal in all markets. However, due to some different reasons, the same asset can be bought and sold at different prices in different markets from time to time. In such cases, an arbitrage opportunity arises.
Since the main purpose of arbitrage is to earn risk-free profit, in such cases the asset should be traded simultaneously in different markets. These processes must be completed in a very short time. This is because prices will equalize in a short time as a result of other traders’ transactions. Although arbitrage is not completely risk-free in theory, it also has challenging points in practice. One of the reasons for this is that in the current situation where the information flow is concentrated, it has become very difficult to detect price differences and evaluate them. For this reason, arbitrage is usually done through software and algorithms specially developed for these transactions.
What is Cryptocurrency Arbitrage and How Does It Work?
Arbitration is also possible in cryptocurrencies and the basics are simple. For a crypto arbitrageur, inconsistencies between changes are always an opportunity, due to the high volatility in prices and trading volume. For this reason, cryptocurrency arbitrage is considered a profitable operation. It offers an excellent way for investors to increase their crypto holdings. In addition, cross-border arbitrage is described as a good way to gain advantage in the market.
In a cryptocurrency arbitrage process, while selling on an exchange, crypto is bought from an exchange that offers the lowest price. The main purpose of arbitrage trading between exchanges is to take advantage of price differences. However, the arbitrage opportunity is not considered a good option there, as the buy-sell spread and trading pairs in traditional markets are small compared to what is seen in the order books of crypto markets such as Ethereum (ETH) or EOS.
A simple arbitrage strategy works by setting up multiple accounts that are priced higher on one crypto exchange and priced lower on the other. The investor takes advantage of market inefficiency to earn profits without too much market risk. This is a well-known trading strategy and it works as long as the transaction fee is not too high. To make the strategy work without manual calculation and practice of trading, a crypto arbitrage trader can develop a crypto bot that trades when exchange platforms offer different price quotes for the same asset.
