Educational Post

What is #Arbitrage Trading?

Arbitrage is the practice of buying and selling assets over two or more markets as a way to take advantage of different prices. For instance, a trader could buy a particular asset in one market and quickly sell the same asset in another market, at a higher price.

The reason why arbitrage exists is due to inefficiencies in the markets. This means that a particular asset may present distinct trading prices in different locations, even though both markets are offering the exact same asset (or very similar ones).

Within cryptocurrency markets, the best way to profit from arbitrage opportunities is to avoid depending on blockchain transactions. For instance, if a trader wants to do arbitrage with Bitcoin in two different exchanges, it would be better for that trader to have an account on both platforms. In addition, both accounts should have enough funds to ensure they can buy and sell immediately, without having to rely on deposit and withdrawal confirmations (which may take thirty minutes or more depending on the network traffic).

When performed correctly, arbitrage may be considered as a risk-free way to capitalize on temporary price disparities. Still, one should keep in mind that trading bots are running on all kinds of markets and many of them were specially designed to take advantage of arbitrage opportunities. Therefore, arbitrage trading may present some risks depending on the strategy and execution.