What is Arbitration

Cryptocurrency

Arbitrage is a trading strategy that aims to profit from the difference in prices of the same cryptocurrency on different exchanges (trading platforms). Essentially, the process involves buying a cryptocurrency on one exchange where the price is lower and selling it on another exchange where the price is higher. The difference between the buy and sell prices is the profit made in the arbitrage.

1. Identification of Different Exchanges

Cryptocurrency exchanges, such as Binance, Coinbase, Kraken, Bitfinex, among others, may present varying prices for the same digital asset. This happens for a number of reasons, such as each platform's liquidity, local demand and trading fees. Arbitrage exploits these price discrepancies.

2. Price Analysis

The first step to carrying out effective arbitrage is monitoring the prices of a specific cryptocurrency on different exchanges. This is done manually or, more commonly and efficiently, using arbitration technology or automated algorithms, which check prices in real time to identify the difference.

3. Execution of Purchase and Sale

After identifying the discrepancy, the api (or trader) purchases the cryptocurrency on the exchange where the price is lowest. Then, he transfers the coin to the other exchange where the price is higher and sells it. The profit will be the difference between the purchase and sale price, minus transaction fees and possible transfer costs.

4. Important Considerations

• Transaction Fees: Each exchange charges trading fees and, in some cases, withdrawal or deposit fees. These fees need to be considered when calculating profit as they can consume a significant portion of the arbitrage, especially on low value trades.

• Execution Speed: The cryptocurrency market is highly volatile, and price discrepancies can disappear quickly. Therefore, it is essential to execute arbitration quickly. Automated arbitration technology and algorithms are essential in this regard.

• Liquidity: Not all exchanges have the same liquidity for all cryptocurrencies. An exchange with little liquidity can make it difficult to execute buy and sell orders at the desired price, making arbitration unfeasible.

5. Practical Example

Let's assume the price of Bitcoin (BTC) is:

• On Exchange A: $100,000

• On Exchange B: $100,700

Apis observes this difference and decides to buy 1 BTC on Exchange A for $100,000 and transfer it to Exchange B. On Exchange B, he sells the Bitcoin for $100,700 making a profit of $700 (discounting transaction and transfer fees).

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