Cryptocurrencies are traded on hundreds of different exchanges, and often the price of a coin or token can vary from one platform to another. This is where the arbitrage strategy comes into play. Similar to using arbitrage in capital markets, crypto arbitrage is a legitimate way to make potential profits when an asset is sold cheaper on one market and more expensive on another.
First, look at the coins in your portfolio. Check their price on different exchanges. You will notice that the price on each exchange is slightly different and either higher or lower. This happens for various reasons, including commission fees, trading volume, and liquidity.
For example, on platforms with low commissions, high trading volume, and high liquidity, prices are generally lower. You can potentially earn on this difference. If you are an experienced trader, you can make a profit by buying a coin at a low price on Exchange A and then selling it at a high price on Exchange B.
Outside the cryptocurrency market, this practice is not new and has been used for decades on traditional stock exchanges. For example, the price of a stock on the New York Stock Exchange may differ from the price on the Tokyo Stock Exchange.
At first glance, earning from arbitrage seems simple: buy at a low price, sell at a high price. However, you need to consider a multitude of factors, such as trading fees of the platforms and hidden costs, which can quickly turn potential profits into losses.