Arbitrage

Arbitrage is the practice of buying and selling assets over two or more markets as a way to take advantage of different prices

What is the Arbitrage in Trading?

Arbitrage is the practice of buying and selling assets over two or more markets as a way to take advantage of different prices. For instance, a trader could buy a particular asset in one market and quickly sell the same asset in another market, at a higher price.

The reason why arbitrage exists is due to inefficiencies in the markets. This means that a particular asset may present distinct trading prices in different locations, even though both markets are offering the exact same asset (or very similar ones).

In the context of financial markets, arbitrage is often considered a fundamental force because it prevents distinct markets from creating significant price disparities among similar or identical assets. Therefore, the practice of arbitrage relies on small price divergences and, as a result, tends to cause a price convergence. The speed at which this convergence occurs may be used as a measure of the overall market efficiency. A perfectly efficient market would present no arbitrage opportunities at all as each trading asset would have the exact same price across all exchanges.

When performed correctly, arbitrage may be considered as a risk-free way to capitalize on temporary price disparities. Still, one should keep in mind that trading bots are running on all kinds of markets and many of them were specially designed to take advantage of arbitrage opportunities. Therefore, arbitrage trading may present some risks depending on the strategy and execution.

Within cryptocurrency markets, the best way to profit from arbitrage opportunities is to avoid depending on blockchain transactions. For instance, if a trader wants to do arbitrage with Bitcoin in two different exchanges, it would be better for that trader to have an account on both platforms. In addition, both accounts should have enough funds to ensure they can buy and sell immediately, without having to rely on deposit and withdrawal confirmations (which may take thirty minutes or more depending on the network traffic).

Although we have at least ten different types of arbitrage strategies, traders are often referring to the one we just described, which is the more traditional form and is known as pure arbitrage. Since this strategy relies on the discovery of market inefficiencies and price disparities rather than speculation, it is often considered as a low-risk approach.

Another less popular method is called merger arbitrage (or risk arbitrage), and as the name suggests, it is a highly speculative approach that relies on a trader’s expectation of a future event to affect the price of an asset. This may include, for instance, companies acquisitions, merges, or bankruptcy filings.

Source: Binance Academy

Recent Posts
Subscribe to the newsletter

Share this article on your social networks:

Share on twitter
Share on telegram
Share on facebook
Share on linkedin
Share on email

The information above contains information on the cryptocurrency market, which is associated with high risks. These materials are presented for informational purposes only and in no way should be construed as a recommendation for the purchase or sale of the assets. Any person considering trading digital assets should seek independent advice on the suitability of any particular digital asset.

Recent Posts

AllBlockchain & CryptocurrenciesTrading
Crypto weekly analysis

Cryptocurrency Market Review (+ VIDEO!) – 30th November

30 Nov 2020

At the time of writing, Bitcoin is today traded at around $18,500....

Read More
Are We About To See An Altseason?

Are We About To See An Altseason? Market Review 24th November

24 Nov 2020

There is no doubt we are in a bullrun, also associated with...

Read More
Bitcoin Price analysis

Bitcoin is consolidating above $16,000 and CME traps week-end shorters

16 Nov 2020

Ever heard about CME? Learn what institutions show you to trap you...

Read More
DeFi : does a decentralized organization engage its responsibility before the law ?

DeFi: does a decentralized organization engage its responsibility towards justice?

08 Nov 2020

Is it possible to engage the responsibility of a decentralized organization (especially...

Read More
Bitcoin Technical Analysis

Bitcoin Surpasses $14,000 during the weekend, the Institutions answer!

02 Nov 2020

Nothing seems to be stopping Bitcoin yet. It has been pushing above...

Read More
Bitcoin Technical Analysis

Bitcoin Technical Analysis – 26th October

26 Oct 2020

Bitcoin broke the $13,000 level last week and is currently consolidating above...

Read More

Receive a digest of Crypto Analysis, News & Articles every week

Receive the latest news

Subscribe To Our Weekly Newsletter

Get notified about new articles, analysis, courses, reviews and more!