Arbitrage is the simultaneous buying and selling of an asset on different markets to profit from the price difference between those markets. In a highly simplified example of how cryptocurrency arbitrage works, you would search for a specific coin that’s cheaper on Exchange A than on Exchange B. You then buy the coin on Exchange A, sell it for a higher price on Exchange B and pocket the difference.

The concept of arbitrage trading is not a new one and has existed in stock, bond and foreign exchange markets for many years. However, the development of quantitative systems designed to spot price differences and execute trades across separate markets has put arbitrage trading out of reach of most retail traders.

• Simultaneous buying and selling
• Different assets
• Different exchanges
• Tried and proved

But arbitrage opportunities still exist in the world of cryptocurrency, where a rapid surge in trading volume and inefficiencies between exchanges cause price differences to arise. Bigger exchanges with higher liquidity effectively drive the price of the rest of the market, with smaller exchanges following the prices set by their larger counterparts. However, smaller exchanges don’t immediately follow the prices set on larger exchanges, which is where opportunities for arbitrage arise.

However, arbitrage opportunities also exist in the opposite direction, where you would buy on a smaller exchange and sell on a larger exchange. The recent surge in the popularity of cryptocurrency has led to a dramatic increase in trading volumes on many exchanges around the world. Those exchanges are not linked, and a low trading volume on some exchanges can mean that the price listed doesn’t adjust to the exchange average immediately. As a result, this has seen the creation of price differences arbitragers could potentially exploit.