What is arbitrage?

How can the same cryptocurrency have a different price on two exchanges at the same moment?

Think of two stores selling the same product at different prices. In crypto, each exchange has its own buyers, sellers and available funds. Their prices don’t always move in perfect sync, especially when the market is moving fast.

In a hypothetical example, a token might be available to buy at €100 on exchange A, while on exchange B there’s a buyer at €102. If someone buys on A and sells the same amount on B, the difference is €2 per token, before fees and other costs. The last traded price on screen isn’t enough: there have to be real orders at those prices, and for the quantity they want to trade.

In practice, many people use automated programs and already keep cash and crypto on different platforms, so that buying and selling happen almost simultaneously. If the token has to be transferred first, the gap may have vanished by the time it arrives.

Why it matters

Arbitrage helps bring prices on different markets closer together. Buying on the cheaper platform and selling on the more expensive one exert opposite pressures, narrowing the gap. Similar trades also take place between decentralized exchanges (DEXs).

For anyone tracking the value of their crypto, this explains why there isn’t one single price available everywhere. The price a tracking app shows isn’t necessarily the price at which a trade can actually be executed.

What to watch out for

We see the idea that arbitrage is “guaranteed profit” as the main trap. Trading fees, withdrawal and network fees, as well as slippage, can wipe out the difference. There’s also the risk that only one of the two trades goes through.

A large gap may be linked to suspended withdrawals, limited deposits or problems at a platform. Also, two tokens with the same ticker aren’t necessarily the same asset. Services promising guaranteed returns through “arbitrage bots” may be using the term as a front for a scam.