Arbitrage is the practice of quickly buying and selling the same asset in different markets to take advantage of price differences between these markets.
So, what are the different types of arbitrage out there? Let’s take a closer look:
- Spatial: This is the most common form of arbitrage since it involves purchasing crypto from one exchange and selling it on another to get more money.
- Convergence: The trader buys their coin on one exchange and sells it short on another. The traders then continue until the prices converge and then close their positions.
- Triangular: The trader trades across multiple trading pairs and multiple exchanges to bag a profit. This is where Flash Loans can come in handy if the assets are on a DEX.
So, why is arbitrage possible? There are multiple reasons:
- Liquidity variations: The liquidity of an asset may vary from exchange to exchange. This will result in slightly different price cross-exchanges.
- Exchange types: Different exchanges target different types of investors or different countries which can affect asset prices.
- Processing times: Exchanges may have different processing times, which would have an effect on the price.
- Foreign exchange rates: Buy crypto in one currency and then go to another exchange and sell it for another currency to pocket profits.
Overall, it is a matter of information. It is nearly impossible to check all exchanges and routings for the optimal exchange rate, though there are aggregators that claim to do exactly this.
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