With cryptocurrency trading still in its infancy and markets spread all around the world, there can sometimes be significant price differences between exchanges. Crypto arbitrage enables to take advantage of those price differences, buying crypto on one exchange where the price is low and then immediately selling it on another exchange where the price is high.
Arbitrage implies purchasing and selling the same asset to gain profit from its price imbalance. This means that, when something is sold on a market at a low price and at a high price on another market, people can buy it from the first one and sell it on the second one, gaining profit from the transaction.
Arbitrage is the simultaneous buying and selling of an asset on different markets to profit from the price difference between those markets. In a highly simplified example of how cryptocurrency arbitrage works, you would search for a specific coin that’s cheaper on Exchange A than on Exchange B. You then buy the coin on Exchange A, sell it for a higher price on Exchange B, and pocket the difference.
The concept of arbitrage trading is not a new one and has existed in stock, bond and foreign exchange markets for many years. However, the development of quantitative systems designed to spot price differences and execute trades across separate markets has put arbitrage trading out of reach of most retail traders.
However, arbitrage opportunities still exist in the world of cryptocurrency, where a rapid surge in trading volume and inefficiencies between exchanges cause price differences to arise. Bigger exchanges with higher liquidity effectively drive the price of the rest of the market, with smaller exchanges following the prices set by their larger counterparts. However, smaller exchanges don’t immediately follow the prices set on larger exchanges, which is where opportunities for arbitrage arise.