What is Arbitrage
Arbitrage is the simultaneous purchase and sale of an asset to profit from price discrepancies. It is a trade that profits on the differences of identical or similar financial instruments on different markets or in different forms. Arbitrage opportunities exist as a result of market inefficiencies. Arbitrage provides a mechanism to ensure prices do not deviate substantially from fair value for longer periods of time. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly, and the opportunity is often eliminated quickly. However, our research suggests that cryptocurrency exchanges can have substantial price differences before reverting to parity.
Example of classic arbitrage
Classic arbitrage assumes leverage, the possibility of selling short asset in higher prices exchange. Note that the example below does not include margin trading fees/interest.
Example of risk-arbitrage
Risk arbitrage means that parts of the trade are not simultaneously entered or that the opposite trade is not 100% equivalent. Below is typical example of exchange, where short selling is not possible.
These are not the only types of arbitrage in cryptoasset space. There are triangle trades, involving more than one cryptoasset or fiat. Even more complicated trades are available, which combined with the volatility makes cryptoassets the most exciting investment market today!
We are currently employing the methods described here, follow us for more stories about cryptoasset trading.