Arbitrage trading capitalizes on fleeting price discrepancies across different markets. Imagine Bitcoin trading for $60,000 on Exchange A but $60,050 on Exchange B. An arbitrageur would simultaneously buy on Exchange A and sell on Exchange B, pocketing the $50 difference.
This strategy thrives on efficiency, requiring rapid execution and sophisticated algorithms. While seemingly risk-free, it's not without its challenges. Transaction fees, slippage, and the sheer speed at which these opportunities vanish can erode profits. Furthermore, significant capital is often needed to make the small percentage gains worthwhile.
Arbitrage opportunities are more common in less liquid or emerging markets, but they are increasingly difficult to find as markets become more integrated and efficient.
