Arbitrage Meaning

Jun 17, 2024 | Updated Jun 17, 2024

Arbitrage is a trading tool used to make profits by simultaneously buying and selling the same asset (or securities) across (or within) marketplaces to make profits off of the margins of the particular asset (or securities). This concept also applies to crypto trading.

What Is Arbitrage?

Arbitrage is a trading mechanism that allows traders to take advantage of small price differences between two or more marketplaces for particular assets (or financial securities).

What Is Crypto Arbitrage?

In crypto trading, arbitrage means taking advantage of market inefficiencies that exist in the crypto sector, such as differences in cryptocurrency prices across different exchanges.

To clarify, prices for digital assets on different marketplaces can vary significantly given that these decentralized markets have different liquidity levels of cryptocurrencies.These price discrepancies across exchanges allow crypto traders to take advantage if they are able to realize their trades quickly enough. However, it is worth noting that this trading practice comes with risks like transaction costs (gas fees per blockchain) and volatility of the crypto markets that could affect potential income gains.

For example, if 1 Ether (ETH) is priced at $3500 on Exchange ‘A’, and priced at $3600 on Exchange B, a trader could buy 1 ETH from Exchange A and sell to Exchange B for a profit of $100.

The different types include:

Cross-Exchange Arbitrage: This strategy takes advantage of price differences across multiple exchanges/platforms.
Intra-Exchange Arbitrage: This strategy occurs within a particular marketplace and exploits the price differences of a particular asset. For example, a trader may choose to exploit the spot and futures prices of an existing cryptocurrency on a particular platform.