What Is Arbitrage?
Also known as: Crypto Arbitrage, Cryptocurrency Arbitrage
In short
Arbitrage is a strategy of trying to earn a relatively low-risk profit from price differences of the same asset across markets by buying cheaply in one market and simultaneously selling at a higher price in another.
Because the crypto market is split across many centralized and decentralized exchanges, the price of the same coin can differ briefly from platform to platform. For example, if a coin trades at 100 dollars on Exchange A and 101 dollars on Exchange B, an arbitrageur tries to earn the difference by buying on A and selling on B. These trades make prices converge and contribute to market efficiency.
Common types include cross-exchange arbitrage, triangular arbitrage that exploits imbalances between three different pairs on the same exchange, arbitrage based on the difference between the spot price and the futures price, and arbitrage between decentralized exchanges. In DeFi, arbitrageurs serve an important function by aligning prices in AMM pools with other markets; some carry out these trades within a single transaction using flash loans.
Price differences are usually small and close within seconds; for this reason, arbitrage is largely done with bots. Trading and withdrawal fees, transfer times, slippage and exchange withdrawal limits can wipe out profit entirely. Situations such as the price changing during a transfer or an exchange suspending withdrawals also make arbitrage less than risk-free.
Last updated: · This content is for information purposes only and is not investment advice.