Crypto arbitrage trading example:
To explain how arbitrage works, let's look at a hypothetical example. Let's assume we have 2 exchanges that both list Bitcoin:
- Exchange A is a major exchange with a high trading volume. The price of BTC on this exchange is US$8,800.
- Exchange B is a smaller exchange with less trading volume. The price of BTC on this exchange is US$8,805.
Now let's assume that there's an important announcement that is likely to encourage people to buy BTC, such as the US Internal Revenue Service announcing that all BTC deposits will never be subject to tax. This prompts widespread demand for BTC, and most buyers head to the biggest exchanges because they offer the easiest way to buy cryptocurrency.
This surge of buyers causes an increase in BTC prices on large exchanges like Exchange A, while Exchange B sees less trading volume and its price is slower to react to the change in the market. BTC reaches US$9,240 on Exchange A, but only rises to US$9,070 on Exchange B, which is where arbitrage comes in. You could do the following:
- Buy BTC on Exchange B at US$9,070.
- Transfer your BTC to Exchange A.
- Sell your BTC on Exchange A for US$9,240, securing a profit of US$140 per BTC.
Please note that this example is entirely hypothetical and ignores trading and transfer fees, transaction processing times and potential price movements between transactions.
* This is a fictional, but realistic, example.