What Is Arbitrage?

Arbitrage is when a trader buys a digital asset in one market and quickly sells it in another in order to profit from a price discrepancy. This trading strategy is generally considered low-risk (but not risk-free). 

An arbitrageur — a trader who engages in arbitrage trading — bases their decisions on the price inconsistencies amongst different markets instead of analysing or predicting the future prices of a digital asset.

Types of Arbitrage

Statistical Arbitrage

Statistical arbitrage refers to a trading strategy that uses statistical and econometric analysis to simultaneously buy and sell large sets of assets. In the modern trading environment, market price inefficiencies generally exist for less than a few seconds, making it nearly impossible for humans to perform this high-speed arbitrage. Thus, the majority of statistical arbitrage strategies involve a high-frequency trading (HFT) system.

Spatial Arbitrage

Spatial arbitrage is a form of cross-exchange trading. It involves buying a digital asset from one exchange and selling it on another exchange while pocketing the price difference. Although this strategy is comparatively simpler to perform, the transfer time and transaction costs can impact the profitability of the trade.

Triangular Arbitrage

Triangular arbitrage is a trading strategy exploiting the price variance between three cryptocurrencies within the same exchange. In practise, triangular arbitrage is a means of converting one cryptocurrency to another, then to a second one, and then back to the original. Similar to statistical arbitrage, a triangular arbitrage opportunity is often completed in a matter of seconds.

Key Takeaway

Arbitrage is a trading strategy in which a digital asset is bought in one market and sold in another to exploit the price difference for a profit.

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