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Cryptoknowmics 2022-02-26 18:00:00

All you Should Know About Cryptocurrency Arbitrage

Cryptocurrencies such as Bitcoin and Ethereum are traded on hundreds of various exchanges globally, and the price of a cryptocurrency on one exchange may differ from that on another exchange. Cryptocurrency arbitrage is a method in which traders purchase a cryptocurrency on one exchange and quickly sell that cryptocurrency for a higher price on another exchange. This is where the old Wall Street tactic of ‘arbitrage’ comes into play. ‘Capturing the arb’ refers to profiting from the fact that an asset is selling for a low price in one exchange but a greater price in another. Traders use crypto arbitrage to take advantage of cryptocurrency’s lower price on one exchange by buying and selling it instantly for a higher price on another exchange. Why are the Prices of Cryptocurrencies on Crypto Exchanges so Different? Centralized Exchanges The first thing to understand is that cryptocurrency pricing on centralized exchanges is determined by the order book’s most recent bid-ask matched order. So, the most recent price at which a trader buys or sells a digital asset on an exchange is termed the exchange’s real-time price. For example, if the most recently matched market order on an exchange is to buy bitcoin for $40,000, this price becomes the platform’s newest bitcoin price. The next matching order will determine the cryptocurrency price after that. Therefore, price discovery on exchanges is a constant process of deciding a cryptocur...

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