Arbitrage is one of the investment strategies that investors often use. This strategy involves investors chasing opportunities by tracking price differences on different exchanges. Arbitrage means buying an asset at a lower price in one market and simultaneously selling it at a higher price in another market. In short, arbitrage allows investors to profit from the difference between two market prices. Although price differences are small and short-lived, the return can be significant when investing in large volumes.
Types of Arbitrage
Arbitrage Between Trading Platforms
This is the simplest arbitrage strategy. Arbitrage between trading platforms means buying a cryptocurrency on one platform and selling it on another.
Triangular Arbitrage
Triangular Arbitrage is an investment strategy that takes advantage of the price difference between three currencies in the market. With this investment strategy, the first currency is converted to the second currency, the second currency to the third currency, and the third currency to the first currency. For example, if the price between Bitcoin and Ethereum is lower than the price between Ethereum and Solana, the investor buys BTC/ETH, then ETH/SOL, and finally SOL/BTC to profit from the difference. So, the amount of BTC owned by the investor increases. Triangular Arbitrage rarely occurs because when such opportunities arise, investors trade to take advantage of price differences. The price returns to the equilibrium level right after the transactions are made.
Cross-Border Arbitrage
Cross-border Arbitrage is an investment strategy that takes advantage of price differences between two or more countries. The investors profit from the difference by buying an asset on the trading platform of a country where the price is relatively cheap and selling it on the trading platform of a country where it is relatively expensive.
Decentralized Finance (DeFi) Arbitrage
Decentralized Finance, or DeFi for short, refers to financial lending protocols that operate without human intervention thanks to smart contracts. Pricing assets on a decentralized platform depends on investors providing liquidity to pools with crypto assets. The goal of the DeFi Arbitrage strategy is to profit from the various instruments offered by DeFi lending protocols. For example, if the BTC/USD trading pair is $20,000 on one platform and $20,200 on another or a centralized trading platform, the investor borrows from the DeFi platform and trades between the two platforms in seconds thanks to the trading bots, bringing the price to equilibrium. The investor earns 1% until the price reaches the equilibrium level. After the investor earns 1% profit, he pays his debt to the DeFi platform.
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