What is Crypto Arbitrage Trading
How Doest It Work
Reasons Why It Might Be Profitable
How to Calculate Cost and Profit
Step-by-Step How to Start
This style of trade capitalizes on price imbalances between markets.
Simply put, this happens when an object happens concurrently purchased and sold in two markets — often because it is traded at slightly different prices.
For example, shares in a technology business may be on sale for $35 on the New York Stock Exchange, but may be available for $35.10 in London. Yeah, the gap is small — but easily bulk buying shares at a cheaper price and selling them at a higher price will result in a tidy profit for an eagle-eyed trader. This definition captures the basic essence of arbitration and is relatively low risk compared to other techniques.
Now, you might be wondering: how do those inefficiencies occur? Yeah, there’s a lot of explanations. Currency volatility can mean that foreign exchange stock is undervalued. Markets are often incomplete, and synchronicity between exchanges can be difficult to obtain. Asymmetrical details between buyers and sellers is also a breeding ground for arbitration. Unfortunately, with such slim profit margins, trade costs will inevitably mean that certain arbitration options have no financial meaning to follow.
Arbitration will operate through a variety of financial instruments beyond stocks — bringing us up to our next issue very well.