When done successfully, crypto arbitrage can literally mean making money out of thin air. But done wrong, it can mean losing huge sums, so make sure you know what you’re doing before you dive straight in.
Simply put, crypto arbitrage means buying cryptocurrency on one exchange and selling it for a higher price on another exchange, allowing you to make a profit.
This process is possible because there are various crypto exchanges out there, and their prices adjust differently depending on their liquidity and how fast they change to general market prices.
Arbitrage is different from other trading strategies since you’re not taking advantage of price changes over time — you’re taking advantage of price differences between exchanges.
As a side note, this phenomenon isn’t unique to cryptocurrencies. You can also do arbitrage for foreign currencies, stocks, precious metals, and other assets. People have been engaging in arbitrage for centuries!
Thinking the whole basis behind arbitrage is a little odd? You’re not the only one — it’s not exactly intuitive to think about buying the same thing in two places for two different prices (or more than two).
Try seeing it this way: Economics textbooks refer to arbitrage as a way to make markets efficient. The argument goes that when markets are inefficient, people will engage in arbitrage until prices finally regulate themselves and become uniform.