Bitcoin Arbitration: What is It, How Does It Work?
Unlike the stock market, where brokers only transfer orders to a centralized stock exchange, in cryptocurrencies this does not exist. In this way, each exchange acts in a totally segregated way, with its own rules, terms, rates, clients and quotations.
Opportunities Arising to Perform Arbitrage
In short, opportunities may arise to perform arbitrage, the purchase to immediately sell the same asset on another exchange, for a higher value. Bitcoin arbitrage can exist between different currencies, even within the same broker.
Although, in theory, Bitcoin, Ethereum, Litecoin are equivalent, regardless of the exchange traded, their quote may vary between them. This can occur due to the different profile of customers, or even a longer period for cryptoactive transfers.
If the user has a daily withdrawal limit, for example, he will probably demand a higher amount when selling his cryptocurrency at this broker. Another common case is when there is low liquidity, that is, lower order flow, causing stronger fluctuations in smaller exchanges.
Generally speaking, arbitrage is a low-risk trade, and its orders are usually executed by robots, systems that place orders simultaneously in different markets. Learn why this happens and how market makers make money in Bitcoin arbitrage.
What is Bitcoin Arbitrage?
Arbitrating Bitcoin means making simultaneous purchases and sales in different markets, seeking small immediate gains. For example, the user can buy 0.002 Bitcoin on an exchange and immediately make the sale at another broker with profit.
Although simple in theory, it is important to remember that for this the interested party needs to keep an amount and Bitcoin still on both exchanges. This is because the time and cost for miners to transfer the cryptocurrencies would make the trade unfeasible.
The same procedure can be used to buy Bitcoin in a North American broker and sell it in other country exchange. In summary, arbitrage involves low-risk trades, seeking to exploit price differences in related markets.
