Getting to Grips with Arbitrage
The world of trading has many different tricks and tools refined over the years by strategists and financiers, and one of these strategies is arbitrage.
The world of trading has many different tricks and tools refined over the years by strategists and financiers, and one of these strategies is arbitrage
Arbitrage is a way to profit from trading assets by exploiting price differences between countries or platforms. In traditional finance, foreign exchange traders would make a profit by buying a certain currency at discount in one country and selling it in another for a premium.
For example: You buy 100 euros for $110 from a broker in the EU.
You then sell that €100 for $115 to somebody back in the US.
You’ve made $5 in profit.
While this example uses price differences between countries, you could also profit from arbitrage by exploiting price differences between different marketplaces, websites, or any other platform.
Arbitrage is a fairly safe and simple trading strategy that doesn’t require any special technical skills or financial knowledge. Since you are buying and selling the same asset on two separate exchanges in a short timeframe, the possibility of significant losses is small.
However, the strategy is not without risk - it requires large amounts of capital to make decent returns and in the rare event that prices change rapidly without warning, you could be left out of pocket. You also need to take into account commission, spreads, and brokerage fees, all of which could negate any profits you make if the price difference between buying and selling is small.
Arbitrage in Crypto
In the early days of the cryptocurrency industry, the difficulty of obtaining Bitcoin in certain countries made it much more desirable, and subsequently, expensive. Traders who were able to buy Bitcoin in cheaper countries and sell it in countries where it was more expensive could take advantage of these price differences. The lack of liquidity on crypto exchanges also made it difficult to negotiate for a specific price, forcing buyers to take what they could get.
One of the most famous crypto arbitrage traders is Sam Bankman-Fried, who made $9 billion over three and half years by buying Bitcoin in the US and selling it in South Korea. High demand for Bitcoin in South Korea at the time pushed the price 50% higher than in the US, in what’s been dubbed the ‘Kimchi Premium’ after the popular Korean delicacy. Nowadays, Bitcoin is more easily accessible in South Korea and the premium has dropped to around 18%.
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