What's that Arbitrage Trading?

By selling the same goods and the same market, how do you balance the market? That's the job of Arbitrage Trading. Understand more here.

Understanding Arbitrage Trading

Imagine a market like a busy bazaar, where traders (exchange platforms) offer the same goods (assets) at slightly different prices. This price inconsistency, driven by factors such as limited information, diverse trading tools, and human behavior, is fertile ground for arbitrage trading.

Arbitrage traders are “market balancers.” They are keen to spot these price gaps and act like super-fast traders, buying cheaper assets and immediately selling them at higher prices elsewhere. 

The Main Role of Arbitrage Trading

Below are the main roles of arbitrage trading:

• Shrinking the Spread: By buying on cheap exchanges and selling on expensive exchanges, arbitrage trading narrows the price differences between exchanges. This makes prices more consistent and reduces future arbitrage opportunities.
• Fair Value Guard: Arbitrage Trading acts like a safety net, preventing assets from deviating too far from their fair value for too long. This ensures a smooth flow of funds between exchanges, maintaining market dynamics and health.

Although it is considered riskless by buying and selling the same amount, arbitrage trading also has the following challenges:

• Must Always Be Fast: Execution is key. Delays can erode profits or even turn them into losses.
  
• Onslaught of Commissions: Every purchase and sale incurs a fee, eroding arbitrage trading profits.

Technology like automated trading can quickly catch price inconsistencies, making arbitrage trading a fast game. However, as long as the market is not completely efficient, these astute traders will continue to play an important role in maintaining market balance and fairness.

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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.