What is Crypto Arbitrage?

Arbitrage traders derive benefit of price differences between markets by buying an asset where it's cheaper and selling it where it's pricier.

This can be done through various means, but the most common is through cryptocurrency arbitrage. This occurs when the same digital asset is bought and sold on two or more different exchanges at different prices.

The crypto arbitrage process can be summed up in three simple steps:

1. Identify an asset with a pricing discrepancy on two or more exchanges.

2. Buy the asset on the exchange where it is cheapest.

3. Sell the asset on the exchange where it is most expensive.

By doing this, arbitrageurs hope to reduce the "spread" between these exchanges, making markets more efficient in the process.

However, cryptocurrency arbitrage is not without its risks. One risk is that the prices of crypto assets can change rapidly, so there is always the chance that an arbitrageur could lose money if they are not quick enough to sell their assets. Additionally, some exchanges may not have the liquidity needed to support large-scale arbitrage trades, meaning that an arbitrage opportunity may not be available. As such, crypto arbitrage should only be attempted by those confident in their ability to trade quickly and effectively.

Arbitration is a key process that helps to ensure that no assets deviate from their fair value for an extended period of time and enhances the flow of liquidity between exchanges.

Since the way arbitration is executed usually doesn't involve taking on price risk (buying and selling the same quantity on different exchanges), most arbitrageurs don't have to worry about losing money on the strategy. However, there is always risk involved with the arbitration, which comes from needing to execute the strategy quickly and the cost of trading (commissions). In addition, arbitrageurs usually pay a lot in commissions because each trading unit requires payment to the different exchanges being used.