Arbitrage is the practice of buying assets in one market and selling them in a different market to generate profit. This practice can be traced back to ancient times around 600 BC. At that time traders used to purchase cheap silver in Persia and sell it at a higher cost in Greece.
Nowadays, people have managed to find a way of continuing the practice through cryptocurrencies. People are utilizing the difference in Bitcoin’s price on various exchanges and using that to earn profits. There are two types of Bitcoin Arbitrage.
This method involves searching for a specific token that a certain exchange is selling cheap and then selling the acquired cheap assets on another firm, in turn, generating profit.
Example: Exchange A sells one Bitcoin for 20 Ether while Exchange B sells 20 Ether for 1.5 Bitcoin. So in turn to use it, you purchase 20 Ether from exchange A and sell it on exchange B for 1.5 Bitcoin generating 0.5 Bitcoin in the process.
However, such opportunities occur rarely and even when they do there’s a very short window to exploit it. Since tokens are constantly being shifted from one exchange to another, the prices are corrected quickly.
This type of arbitrage involves converting tokens to fiat when the price of one token in a certain exchange is greater than the rest.
However, there are certain obstacles that prevent this arbitrage, as various firms require a great amount of verification data before making the transactions. Moreover, different firms have different fees for transactions, that is to note before making a move. Furthermore, this method may result in a loss due to many factors including price volatility.