Arbitrage trading is a strategy of trading. In this trading, it takes advantage of price differences for the same asset across different markets. In the context of crypto markets, this involves buying a digital currency on one exchange where the price is lower and selling it on another exchange where the price is higher. This form of trading can be lucrative as the nature of the crypto market is highly volatile. I shall cover the topic of buying at a low price and selling at a high price in this series sequentially. Today will share the concept only.
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Arbitrage trading exploits market inefficiencies. In traditional markets, arbitrage opportunities are often limited due to high efficiency and quick price corrections. But the crypto market is still relatively young and fragmented, it is offering huge arbitrage opportunities. Different exchanges might list the same crypto at varying prices due to differences in liquidity and user base. For example, in case Bitcoin is estimated at $30,000 on Trade A and $30,200 on Trade B. A dealer may purchase Bitcoin on Trade A and instantly offer it on Trade B, winning $200 per Bitcoin within a very short time spending. This procedure abuses showcase wasteful aspects and requires speedy execution to capitalize on cost disparities. Arbitrage can be done physically or through computerized exchanging bots that screen and execute exchanges over a huge number of trades to maximize benefits. This strategy can be beneficial but also comes with dangers such as cost instability & exchange delays. It has some positive and negative sides. I shall cover types and positive and negative impacts in the next posts.
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