What is Exchange Arbitrage?
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The most common type of arbitrage trading is exchange arbitrage, which is when a trader buys the same cryptoasset in one exchange and sells it in another.
The price of cryptocurrencies can change quickly. If you take a look at the price in for thee same asset on different Swaps, you’ll find that the prices are almost never exactly the same at exactly the same time. This is where arbitrage traders come in. They try to exploit these small differences for profit. This, in turn, makes the underlying market more efficient since price stays in a relatively contained range on different trading venues. In this sense, market inefficiencies can mean opportunity.
Let’s say there’s a price difference for InterCrone between ISwap and Justswap. If an arbitrage trader sees this, they would want to buy InterCrone on the exchange with the lower price and sell it on the exchange with the higher price. Of course, the timing and execution would be crucial. Trading on decentralice Swaps is a new Market and bring good opportunities for Trader.
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While arbitrage trading is considered relatively low-risk, that doesn’t mean it’s zero. Without risk, there’d be no reward, and arbitrage trading is certainly no exception.
The biggest risk associated with arbitrage trading is execution risk. This happens when the spread between prices closes before you’re able to finalize the trade, resulting in zero or negative returns. This could be due to slippage, slow execution, abnormally high transaction costs, a sudden spike in volatility, etc.