Arbitrage is the simple concept of buying for less and selling the same product for more. You can make a profit by taking advantage of different market prices for essentially the same product with zero risks! And in case you are wondering: arbitrage is absolutely legal.
Example: If Paraguay sells the same product for cheaper than in Brazil, Brazilian people would cross the border to purchase the product and reselled it in Brazil, and as Paraguayans would purchase the product and sell it in the Brazilian market. And this type of “trading” can be very beneficial in regulating the true value of a product or even a currency.
So, you buy a product at a cheaper market and sell it at a higher price market. And traders will take advantage of this over and over until both markets level out in price.
Why does this happen?
Because the market they are purchasing from will increase in demand (because they keep buying more) which will make prices go up, and the market they are selling to will increase in supply (because they keep selling to them) which will make prices go down. Eventually, they both hit the same price mark, and traders will be forced to find another market gap in prices and start all over again.
Take a look at the example below, “Kenny” bought 10-apples for 10$ in one market and traveled to another market to sell the same 10-apples for 15$ and makes 5$ just for doing that. He took advantage of the different market prices and made good money, and for that reason, he will keep doing it over and over until (as mentioned above) the prices between markets levels out.
The entire process of arbitrage contributes to market efficiency. Market Efficiency is when a product has hit its true value (after all aspects and information have been taken into consideration) and prices do not need to be “beat” because there are no undervalued or overvalued products.
With the market’s volatility, cryptocurrency arbitrage can be trickier, though there´s a huge advantage of having exchanges all around the world. It is still the same concept; you buy at exchange A for a lower price and sell immediately at exchange B for a higher price. Sometimes with the newer coins, there is a difficulty in finding different exchanges that carry the new coins.
“Except in the trading world, there is no waiting — arbitrage opportunities come and go in the blink of an eye. Sometimes selling and buying must even occur simultaneously” –Kenny Li (Hackernoon)
Coinlib is a cryptocurrency price listing tool designed for arbitrage it shows exchanges with the best and the worse prices in the market for selected trading pairs. And CROSSD is an arbitrage tool website.
When price-arbitraging be careful with the fees charged by the exchanges, the blockchain network fees and the time that is taken between transactions so that the end result works out in your favor, after all, there´s no point in making a profit and have it be consumed by fees. Also not managing your time accordingly in such a volatile market can be risky, prices change at every minute.
Simple Arbitrage should happen quite quickly, you buy BTC in USD (for ex) and sell at another exchange for USD. Now, if you decide to trade between 3 different currencies (fox ex: you buy BTC in USD, sell BTC for EUR), better known as Triangular Arbitrage, you should also consider the timing between each exchange and local region regulations, in case your trading outside your country for profits.
Hope this has been a simple enough explanation…
We Wish You The Best of Tradings!
Disclaimer: Our team works hard to bring you the best content in the cryptocurrency market, but it is only our point of view and not legal advice, and may be divergent from other opinions, so please do not make any decisions without concluding studies of your own to understand the profit possibilities and uncertainties involved at your own risk.