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Arbitrage has been a mainstay of traditional financial markets long before the emergence of the cryptocurrency market. And yet, there seems to be more hype surrounding the possibility of arbitrage opportunities in the cryptosphere.
This is most likely the result of the crypto market's high volatility compared to other financial markets. Thus, crypto asset prices tend to fluctuate significantly over a given period of time. Due to the fact that crypto assets are traded across hundreds of exchanges worldwide 24/7, there are more opportunities for arbitrage traders to find profitable price discrepancies.
Traders would only need to identify a difference in price of a digital asset across two or more exchanges and execute a series of transactions to take advantage of the difference.
For instance, suppose the price of bitcoin is $45,000 on the Coinbase cryptocurrency exchange and $45,200 on Kraken. Crypto arbitrageurs might notice this disparity and buy bitcoin on Coinbase and sell it on Kraken to pocket the $200 difference in price. A typical example of crypto arbitrage.
Why do crypto exchange prices differ from one another? Due to centralized exchanges. The first thing that you should know is that the pricing of assets on centralized exchanges is determined by the most recent bid-ask matched order on the exchange order book. For example, the most recent price at which a trader purchased or sold a digital asset on an exchange is considered the real-time price of that asset on that exchange.
As an example, if the order to buy bitcoin for $60,000 is the most recently matched order on an exchange, this price becomes the latest price of bitcoin on the platform. After this, the next matched order will also determine the next price of the digital asset. In other words, price discovery on exchanges is a continuous process of setting the market price of a digital asset based on its most recent selling price.
https://en.wikipedia.org/wiki/Crypto
https://en.wikipedia.org/wiki/Arbitrage
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