What is arbitrage?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Arbitrage means exploiting a price difference in the same asset: buy where it is cheap, sell where it is dear. In theory you simply collect the gap; in practice fees, transfer times and withdrawal limits all eat into it. Seeing a gap and being able to capture it are two different things.
Key points
- Trading on a price difference in the same asset
- Fees, spreads and transfer times erode the gap
- Price can move while assets are in transit
- It pushes prices back towards each other
Definition
A trade that buys the cheaper venue and sells the dearer one when the same, or effectively the same, asset is priced differently in two places.
The simplest form is cross-exchange arbitrage: Bitcoin is cheaper on venue A than on venue B, so you buy on A and sell on B. There are other varieties too, such as spot-versus-futures basis trades and triangular arbitrage across three pairs.
Execution costs stack up, though: trading fees on both legs, slippage from consuming the book, transfer fees between venues and fiat deposit or withdrawal charges. A gap that looks like a few percent often disappears once all of these come out.
Timing risk is larger still. Prices move while assets are in transit, and a congested transfer can take tens of minutes. If the gap reverses meanwhile, you take a loss. Pre-funding both venues lets you trade simultaneously, but then that capital sits idle permanently.
Watch out for
- · Profit calculated from quoted prices alone usually turns negative in practice
- · Withdrawal suspensions and maintenance can strand one leg of the trade
- · Granting withdrawal rights to a trading API key makes any leak catastrophic