Cryptocurrency arbitrage is a strategy in which investors buy a cryptocurrency on one exchange, and then quickly sell it on another exchange for a higher price.
Cryptocurrencies trade on hundreds of different exchanges, and often the price of a coin or token may differ on one exchange versus another. That’s where the strategy of arbitrage comes in: Similar to using arbitrage in capital markets, crypto arbitrage is a legal way to earn a potential profit when an asset is selling cheaper in one market and at a higher price in another.
That said, crypto arbitrage comes with some potential risk factors. Here’s a closer look at how crypto arbitrage works, and trading strategies that use the tactic.
Crypto markets are not regulated, and cryptocurrencies are decentralized and therefore — with the exception of stablecoins — are not pegged to government or fiat currencies like the dollar. This is one of the primary reasons why the prices of different crypto can vary widely: there is no standard price for any particular coin or token.
Related to this, some crypto exchanges are bigger than others, with higher trading volume. Thus the supply and demand on one exchange could be quite different from another, affecting the price.
Finally, crypto trading fees also vary, and can add to the cost of your trades.
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