Arbitrage

Arbitrage involves capitalizing on price differences of the same asset across multiple markets. Traders buy the asset at a lower price from one market and simultaneously sell it at a higher price in another market, thereby making a profit.

Arbitrage is a common trading strategy, often automated, that helps stabilize asset prices. When an asset is priced too high or too low in certain markets, arbitrage opportunities arise. Traders can profit from these discrepancies until the prices reach equilibrium across the markets.

In cryptocurrency markets, arbitrage opportunities can exist due to varying levels of liquidity, different trading pairs, regional demand disparities, or technical inefficiencies between exchanges. These price gaps tend to be short-lived as arbitrageurs quickly act on them, effectively bringing prices back into alignment.

While arbitrage seems like risk-free profit, traders must consider transaction fees, transfer times, price slippage, and market volatility. In fast-moving markets, prices can change before trades are completed. Additionally, network congestion on blockchains can delay transfers between exchanges, increasing exposure to price risk.