Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies. -Investopedia
Opportunities for arbitrage
- Equity mutual funds which are hybrid in nature: where the small portion is allocated to debt.
- The price difference that is triggered by any news related to the stock, quarterly and annual results, etc.
- A volatile market gives a lot of arbitrage opportunities and so arbitrage funds perform best in this market.
Barriers for arbitrage
Although it is being said that arbitrage is a risk free equity but there are still some components to be reconsider before doing arbitrage: Taxations and Fees. Everyone can be rich easily if there is no such a thing. But here’s the thing, the price difference may seems profitable but only if all the tax fees is being put in the calculation. The higher the fees, the harder for investors profiting from arbitrage. They have to cope with larger or right amount of the asset to make sure the benefits are larger than costs.
Arbitrage in cryptocurrency markets
We can see many arbitrage opportunities in the crypto markets. For example Bitcoin is being traded at the price of $11, 283 at Coinbase and $11, 353 at Bittrex. We can see the price difference between these two markets. Without considering all those transaction fees, we can make $70. But wait making money is not that easy. Here’s the reason:
Barriers to crypto arbitrage:
- The time it takes to verify each of the transactions (buying and selling) can add up and the exchange rate might change within that timeframe.
- Many exchanges require a lot of verifications in order to trade a large number of the crypto.
- Depositing fiat currency can be a time taking process (can take up to 10 days depending on your payment method).
- Many exchanges have fees.
- Price differences also reflect an exchange’s reputation