Arbitrage is a term borrowed from traditional finance and economics that defines the act of quickly buying a digital asset on one cryptocurrency, navigating to another exchange where that same asset is priced higher, and selling that asset for a profit.
There are more than 200 exchanges worldwide, with relatively similar asset prices across the same cryptocurrencies.
However, due to the nature of the crypto market and exchanges operating independently of other exchanges and their operations, you’ll notice sometimes that the same digital asset on two exchanges is priced differently.
Arbitrage traders monitor these prices in real-time, looking for price differences large enough to absorb transmission fees incurred from moving currencies between exchanges and still making a profit.
Arbitrage traders do, however, have to account for the time and cost of the transmission fees.
Executing this strategy in a profitable manner requires traders to be as close to instantaneous as possible when making the trade, often having to pay higher commission fees than normal to give their transaction priority over other transactions.
A simple example of an arbitrage trade is buying 1 Bitcoin (BTC) on Coinbase for $20,000 and then selling that 1 Bitcoin (BTC) on Kraken for $20,500.
The advancements in automated trading and trading bots are making it harder for retail traders to gain opportunities in executing such trades, as automated trading can execute trades in fractions of a second.