What is Arbitrage?

Arbitrage is a trading strategy that exploits small price discrepancies of the same asset across different markets or exchanges. In cryptocurrency, this involves buying a coin on an exchange where the price is lower and immediately selling it on another exchange where the price is higher, capturing the difference as profit.

How it Works in Crypto

1. Identify Opportunity: Traders use bots or manual monitoring to find price differences for the same trading pair (e.g., BTC/USD) on multiple exchanges.
2. Execute Trades: Simultaneously place a buy order on the lower-priced exchange and a sell order on the higher-priced exchange.
3. Profit: The profit is the price difference minus trading fees and withdrawal/transfer costs.

Types of Crypto Arbitrage

• Simple Arbitrage: Exploiting price differences between two exchanges.
• Triangular Arbitrage: Exploiting price discrepancies between three different cryptocurrencies on the same exchange (e.g., buying BTC with USD, selling BTC for ETH, selling ETH back to USD).
• Spatial Arbitrage: Exploiting price differences across different geographical locations (less common in crypto due to global nature but can exist due to regulatory or banking differences).

Challenges

• Speed: Price differences often exist for only fractions of a second, requiring fast execution (often automated).
• Fees: Trading fees, withdrawal fees, and network fees can erode or eliminate potential profits.
• Transfer Times: Moving funds between exchanges takes time, during which the price difference might disappear.
• Slippage: Large orders can move the price, reducing the expected profit.

Related Terms

• Exchange
• Order Book
• Trading Bot (Implicit - uses existing Bots.md)
• Slippage