Introduction to Arbitrage

Cryptocurrency is a decentralized medium of exchange that does not require a central authority. This decentralization also means that cryptocurrency projects don’t have a central venue for trades to go through. This makes it easier for market inefficiencies to arise, creating opportunities for profit.

For example, in traditional finance, a trader buying a stock in RobinHood may be paired with a seller using Interactive Brokers. In crypto this doesn’t happen. A trader buying Bitcoin using Binance has no direct connection to someone selling on Coinbase. Despite this, prices are generally consistent across exchanges, mainly due to arbitrage.

Arbitrageurs will maintain a balance of cryptocurrency in multiple exchanges and perform arbitrage whenever the exchanges are trading at a different price, instantly profiting from the difference.

“The most advanced market participants, often called liquidity providers or market makers, trade across all of the most active exchanges across the globe simultaneously. The advanced trading systems built by high-frequency traders monitor the order books on all of the major exchanges around the clock.”