Arbitrage
Arbitrage means profiting from a price difference for the same asset in two places, by buying where it is cheaper and selling or redeeming where it is more expensive, ideally at the same time so that price moves cannot hurt you.
The basic idea
If one bitcoin costs 100 dollars more on exchange A than on exchange B, a trader can buy on B and sell on A and keep the difference, minus costs. Every arbitrage trade pushes prices back together: buying lifts the cheap price, selling lowers the expensive one. That is why arbitrageurs are an important part of how markets stay consistent.
Common forms in crypto
Cross-exchange arbitrage exploits gaps between trading venues. DEX arbitrage keeps the prices of automated liquidity pools in line with the wider market; much of this is done by automated bots.
Stablecoin arbitrage supports the peg. Say a dollar stablecoin trades at 0.98 dollars. Someone who can redeem it with the issuer for 1 dollar buys 10,000 coins for 9,800 dollars and redeems them for 10,000 dollars. That buying pressure helps push the price back toward 1. Above the peg, the reverse happens: arbitrageurs mint new coins at 1 dollar and sell them higher.
Futures arbitrage, such as the basis trade, profits from the gap between a futures price and the spot price.
Why it is harder than it looks
Visible price gaps are often smaller than the costs: trading fees, withdrawal fees, gas and slippage. Moving coins between exchanges takes time, and the gap may close or reverse before the transfer arrives. Withdrawals can be paused, and direct stablecoin redemption is often only open to verified customers with minimum amounts, so ordinary users cannot use the mechanism directly.
Risks
Arbitrage is often described as risk-free, but in practice it rarely is. Counterparty risk applies whenever funds sit on an exchange. A stablecoin trading below its peg may be cheap for a good reason, and the peg may not return. Bots compete in milliseconds, so manual traders usually see opportunities only after they are gone.
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Frequently asked questions
Is crypto arbitrage risk-free?
No. Fees, transfer delays, frozen withdrawals, exchange failures and pegs that do not recover can all turn an apparent gap into a loss.
Why do prices differ between exchanges?
Each exchange has its own buyers, sellers and liquidity, and moving money between them takes time and costs fees, so small gaps can persist.
How does arbitrage keep stablecoins near 1 dollar?
When the price drops below 1, arbitrageurs buy and redeem with the issuer at 1; when it rises above 1, they mint and sell. Both actions pull the market price toward the peg.
Related terms
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