What is arbitrage in crypto?

Arbitrage in crypto refers to the practice of taking advantage of price differences for the same cryptocurrency across different exchanges or trading pairs. Traders buy the cryptocurrency at a lower price on one exchange and simultaneously sell it at a higher price on another exchange, profiting from the price disparity. This is mostly facilitated by searcher bots extracting MEV.

How does crypto arbitrage work?

Crypto arbitrage relies on the inefficiencies and variations in cryptocurrency prices among different exchanges. Traders constantly monitor multiple exchanges and execute trades quickly to capitalize on price discrepancies before they normalize. Automated trading bots are often used to identify and execute arbitrage opportunities efficiently.

What are the risks of crypto arbitrage?

Crypto arbitrage involves various risks. Firstly, price disparities can be short-lived, and execution speed is crucial, as delays may result in missed opportunities or losses. Secondly, withdrawal and transaction fees on exchanges can impact the overall profitability of the arbitrage trade. Lastly, market volatility can lead to unexpected price movements, potentially turning profitable trades into losses if not managed carefully. Traders need to be well-informed, use robust risk management strategies, and understand the mechanics of arbitrage trading to minimize risks effectively.