All About Arbitrage: Exchange Arbitrage

Arbitrage has existed for a long time; however, it is far less understood by many traders than techniques such as traditional day trading. That being said, arbitrage is once again gaining popularity in the world of cryptocurrency. In this article series we will be taking a look at arbitrage.

Arbitrage Basics

Arbitrage is all about finding one asset that is priced differently within different markets. The basic concept is to buy the asset within one market and sell it in another market where it is priced higher. The result is to profit off the difference. There are several different ways to arbitrage, which we will cover later.

Arbitrage is generally considered to be one of the safest trading practices. Not only does it work in every market, but it is also far less dependent on market conditions than other methods of trading. Because arbitrage is such an old technique, arbitrage opportunities are somewhat hard to find in traditional markets. The cryptocurrency market however offers many opportunities for arbitrage because there are so many cryptocurrencies, trading pairs and exchanges where arbitrage can be applied. For this reason, arbitrage is becoming more popular amongst individual cryptocurrency traders. Trading bots are exceptionally efficient tools for taking advantage of arbitrage opportunities, as pretty much all arbitrage nowadays is controlled by automated systems.

History of Arbitrage

Arbitrage is one of the oldest methods of trading. Although the exact origin of arbitrage is unknown, the term “arbitration of exchange” first appeared in writings which date all the way back to approximately 1010 AD – the Middle Ages – around the time of the first crusade. Like most things in that point in history, arbitrage was controlled by church doctrine, ergo exchange rates for given fairs needed to be approximately consistent with triangular arbitrage to avoid sanctions from the church. Since then, arbitrage has been used in every market from coinage and bullion, all the way to our modern-day cryptocurrency markets.

Exchange Arbitrage

Anyone who has ever compared the price of bitcoin between two exchanges has likely made an interesting discovery: The price of Bitcoin on one exchange is different than the price of Bitcoin on another exchange. You might consider buying some bitcoin at a lower price on one of the exchanges and sending it over to the other exchange where it is more valuable, but the problem with this method is that it takes time. The price will often fluctuate so much on both exchanges that by the time your Bitcoin arrives on the other exchange, the price will have already rebalanced, and your arbitrage opportunity will have diminished.

There is however a way around this. Rather than sending funds – such as Bitcoin – from one exchange to another, you can simply hold both Bitcoin and Fiat currency on both exchanges. When you notice an arbitrage opportunity has developed, you can buy Bitcoin on the undervalued exchange, and sell Bitcoin on the overvalued exchange at, or around the same time. If done correctly, you can pocket the difference, or “spread.” This is by far the most effective method for executing an exchange arbitrage play.

Conclusion

As we mentioned earlier, there are several varieties of arbitrage. Be sure to keep an eye out for our next article, in which we explain the other methods of arbitrage, and how they can help you make successful trades!

Killer Whale Crypto

CHANGE THE WAY YOU TRADE