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Profiting From Price Differences Across Crypto Exchanges

Learn about the concept of arbitrage and why a single digital asset can trade at two different prices.

Gemini-Profiting From Price Differences Across Crypto Exchanges

Summary

Because the price of a digital asset varies across crypto exchanges, investors and traders can profit by buying and selling crypto assets across different markets. This is called an arbitrage opportunity. And even for people that aren’t day trading crypto assets, this arbitrage leads to price discovery, determining the true value of the asset.

If you compare any cryptocurrency across exchanges at the same point in time on any given day, chances are you’ll see differences in its price — often between 1-2%, but sometimes even 4-5% on busy trading days. How can a single asset trade at two different prices?

Price differences exist because markets are not truly efficient, meaning the price of a digital asset varies slightly across markets due to the different fees that crypto exchanges charge investors, as well as the varying levels of trade volume and liquidity on any given exchange. Varying prices across exchanges create what’s known as an arbitrage opportunity, the purchase and sale of an asset in order to profit from differences in the asset's price across markets.

Arbitrage opportunities in cryptocurrency are mainly employed by short-term day traders and professional investors looking to make short-term profits (but may also be implemented over longer time periods).

For those who don’t have the time and energy to start actively seeking arbitrage opportunities, there’s still good news. When other investors employ arbitrage strategies, the prices of cryptocurrencies across exchanges actually become more aligned. Essentially, supply and demand meet in the middle at what is called the spot price — the price of the asset agreed upon by both the buyer and seller at a given time and place, usually on a specific exchange. This process, known as price discovery (in all of finance — not just crypto), helps determine the true value of the asset in question.

It is important to consider the fees that an exchange charges when calculating how advantageous a crypto arbitrage opportunity might be. If several fees (transaction fees, usage fees, etc.) surpass the value difference of the actual trade, then the arbitrage opportunity is nullified.

For more information on arbitrage and profiting from price differences at various crypto exchanges, read “What Are Trading Pairs?”

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